Bernanke to Offer Outlook as Fed Weighs Bolder Steps

With fresh signs that the housing market is weakening, the Federal Reserve chairman, Ben S. Bernanke, on Friday will offer his outlook on the economy, explain the Fed’s recent modest move to halt the slide and possibly outline other actions.

AP Federal Reserve Chairman Ben Bernanke.

Mr. Bernanke’s speech, at an annual Fed symposium in Jackson Hole, Wyo., will be his first public comments since the Fed announced it would invest proceeds from its holdings of mortgage bonds to buy more long-term Treasury securities to prop up the recovery.

It is not known what Mr. Bernanke will say, but some insight may come from an episode in his past: his concern, soon after he became a Fed governor, that the economy was at risk of deflation as the nation gradually recovered from the dot-com bust a decade ago.

Mr. Bernanke’s worry then is similar to what troubles the Fed now, and his views will have no small bearing on the Fed’s course of action. These days the Fed confronts the combination of persistently high unemployment and an inflation rate so low that it worries economists.

Whether policy makers should take big steps to tackle the economic doldrums — by printing even more money and buying even more assets — will be the dominant question at the symposium and at the Fed’s next meeting on Sept. 21.

Within the central bank, several officials are alarmed at the threat of the economy falling into a dangerous cycle of declining demand, wages and prices not experienced since the Depression. They say that a deflationary, double-dip recession is unlikely, but want to formulate concrete steps to ward it off.

Other officials contend the economic indicators, while dismaying, do not represent an immediate threat, and worry that additional monetary stimulus by the Fed could erode the already shaky confidence of the markets, or even backfire by eventually spurring uncontrolled inflation.

The Fed has not confronted the risk of deflation since 2003. An examination of transcripts from the deliberations of the Fed’s policy-making group, the Federal Open Market Committee, during that spring sheds some light on the challenges Mr. Bernanke faces in maintaining a consensus in the committee as it approaches the problem today.

In a confidential briefing before the committee’s meeting on May 6, 2003, Fed economists estimated that there was a 35 percent chance that the fragile economy, still recovering from the 2001 recession, would face deflation by the end of 2004.

Mr. Bernanke, who had joined the Fed’s board of governors just nine months earlier, warned about the potential danger of deflation, according to the 2003 transcripts, which were made public last year. He said that “for the first time in many decades” the Fed faced greater danger from the risk of its inflation estimates being too high, rather than too low.

He wanted the Fed to draft “a plan for how we might proceed seamlessly from standard rate-cutting to more nonstandard operations should such operations become necessary.”

It would be five more years — and one boom-and-bust cycle later — before the Fed would have to apply that advice.