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Bernanke, Fed have few options as economy slows

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Federal Reserve Chairman Ben Bernanke will appear before Congress' Joint Economic Committee Thursday morning.

Updated at 2:25 p.m. ET: Federal Reserve Chairman Ben Bernanke is likely to express deep concern about the deteriorating global economy Thursday, but it’s not clear he can do much about it.

After nearly four years of pumping trillions of dollars into the economy through unprecedented easing of monetary policy, Bernanke and his colleagues appear increasingly divided over the wisdom of doing much more.

Bernanke will make his views clear in an appearance on Capitol Hill Thursday. Several central bankers have expressed reluctance to take further action even after last week’s dismal U.S. employment report and a growing economic crisis that has thrown the future of the eurozone into question.

Dallas Fed President Richard Fisher said Fed policymakers "must keep their heads about them" after the rash of weak data and resist trying to solve economic problems with more monetary stimulus. "Short of an implosion, I cannot support further quantitative easing," he said in a speech in Scotland.

James Bullard, president of the St. Louis Fed, took a more wait-and-see attitude. “The outlook for 2012 has not changed significantly so far,” he said in a speech.

"A change in U.S. monetary policy at this juncture will not alter the situation in Europe,” he added.

While Bullard and Fisher currently have no vote on the Fed’s policymaking Open Market Committee, their comments echo those of voting member Sandra Pianalto, president of the Cleveland Fed, who also has not seen enough to convince her that further policy action is required.

"I don't think this employment report, in and of itself, is likely to lead to a substantial change in my outlook,” she told The Wall Street Journal. “Consequently, it would not lead me, at this time, given what I know about my outlook, to change my position on policy."

On the other side is Charles Evans, president of the Chicago Fed, who said the employment report has only increased his conviction that the Fed needs to act.

"With huge resource gaps, slow growth and low inflation, the economic circumstances warrant extremely strong accommodation," Evans said this week in remarks prepared for delivery to the Money Marketeers of New York University. “Failure to act aggressively now will lower the capacity of the economy for many years to come."

The crisis in Europe is largely beyond the ability of U.S. policymakers to control but has created growing nervousness on financial markets. Stock prices, which have been under heavy pressure, soared Wednesday in part on news that European policymakers were working on plans to rescue Spain’s banks, although Madrid has not yet requested such assistance.

But while the European crisis must be resolved in Europe, the Fed has a dual mandate to keep inflation low while maximizing employment.

On that front there is little for Bernanke to be proud of. While the unemployment rate has gradually dropped from a peak of 10 percent in 2009 to its current 8.2 percent, job growth has all but stalled.

After adding more than 500,000 jobs in the first two months of this year the economy has added a mere 289,000 in the past three months, not even enough to keep up with the nation’s growing working-age population, much less lower the unemployment rate.

To be clear, the U.S. economy has not fallen off a cliff. The Fed's Beige Book report released Wednesday, to be used as a guide at the June 19-20 meeting of policymakers, describes economic growth showing signs of "modest increase."

In any case, the question is what more the Fed can do. Short–term interest rates already are near zero, as they have been since December 2008. The Fed already has promised to keep interest rates at current exceptionally low levels “at least through late 2014.”

The options are limited. The most aggressive action discussed, another round of so-called quantitative easing, would involve the central bank buying billions of dollars worth of long-term securities, bringing down longer-term interest rates. Rates on 30-year mortgages already are at record lows, typically under 4 percent, and analysts do not expect the Fed to announce such a move when they meet later in the month.

Another less aggressive bond-buying program, dubbed Operation Twist, is due to end this month although the Fed could extend or modify it.

So-called Fed “hawks,” like Fisher, worry about the potential for sparking inflation down the road if the Fed continues its highly aggressive easy-money policy.

Tony Crescenzi, a longtime Fed watcher and portfolio manager for bond giant Pimco, says Bernanke and fellow policymakers are likely to keep using the central bank’s “bully pulpit”  to signal their willingness to act if needed, despite the obstacles.

“I think as long as they convey that idea, that they will do more and that they are activists, whether or not they act it won’t be immediately consequential to markets,” he said.

One factor working in the favor of so-called “doves” like Evans, is that inflation does not seem to be a major threat right now, especially with oil prices tumbling.

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