Oct. 4, 2011, 3:27 p.m. EDT
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — Federal Reserve Chairman Ben Bernanke Tuesday said the central bank’s new policy of swapping bonds is not a “game-changer” but should help the economy avoid a new downturn.
“We think this is a meaningful, but not an enormous support to the economy,” Bernanke told a congressional committee Tuesday.
The central bank last month pledged to swap $400 billion of short-maturity government bonds into longer-maturity ones, and also said it would reinvest proceeds from maturing securities into mortgage-backed securities, taking a page out of what the central bank did in the 1960s under a program called “Operation Twist.”
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The Fed chairman said the program is equivalent to a 50 basis point reduction in the federal funds rate and would lower long-term rates by 20 basis points.
“It should help somewhat on job creation and growth. It is particularly important now that the recovery is close to faltering,” he said.
Bernanke said he didn’t have a precise estimate of how much the Twist plan would boost gross domestic product.
“I would just put it as a moderate support, not something that is expected to radically change the picture, but should be helpful” to support growth while keeping prices stable, Bernanke told the Joint Economic Committee of Congress.
Stocks remained stuck in negative territory all day. The Dow Jones Industrial Average was recently down 180 points to 10,479.
Bernanke wasn’t optimistic about the outlook. He said a close reading of recent economic data doesn’t show any hint of improvement ahead for the weak U.S. labor market.
“Recent indictors, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Bernanke said. Last week the central bank chief called the weak labor market a national crisis.
On Friday, the government will release crucial nonfarm payroll report for September.
The consensus forecast of economists surveyed by MarketWatch calls for a paltry 59,000 net new jobs created in September and for the unemployment rate to remain steady at 9.1%. The jobless rate has been near or above 9% since April 2009.
Overall, the economy should pick up from the tepid 0.9% average growth rate of the first six months of the year, Bernanke said.
Risks from Europe
Bernanke said that is remains “difficult to judge” how much the financial strains of the European debt crisis have affected U.S. economic activity thus far.
“But there seems little doubt that they have hurt household and business confidence, and that they pose ongoing risks to growth,” Bernanke said.
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