Bernanke ready to combat deflation

Federal Reserve chairman Ben Bernanke said Fridaythe U.S. central bankwill consider printing more money if signs of deflation become evident.

Bernanke said the Fed wouldmake another large-scale purchase of securities to increase the money supply if the slowing economy were to deteriorate significantly and signs of deflation were to flare.

He made his remarks at the Feds annual retreat and symposium at Jackson Hole, Wyo., less than two hoursafter the government said the economy slowed sharply in the second quarter to a 1.6 per cent pace.

Bernanke described the economic outlook as "inherently uncertain" and said the economy "remains vulnerable to unexpected developments."

Some economists worrythat the country could lapse back into a recession.

Growth 'less vigorous'

Although Bernanke acknowledged the recent pace of growth is "less vigorous than we expected" he said he still believes the economy willpick up next year.

The Fed chief stopped short of committing to any specific action, butraised the prospect of another Fed purchase of securities, most likely government debt or mortgage securities, to drive down rates on mortgages and other debt to spur more spending by Americans.

He also outlined two other options. One is to be more specific about how long Fed policymakers plan to keep interest rates at record lows.

For more than a year, the Fed has been pledging to hold rates at ultra-low levels for an "extended period."

Or, he said, the Fed could cut to zero the interest it pays banks to keep money parked at the Fed. That rate is now 0.25 per cent.

"The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do," Bernanke said.

"The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using each tool."

Deflation is a widespread and prolonged drop in wages, the prices of goods and services and in the value of stocks, houses and other assets. At its worst, during the Great Depression, it resulted in yearsof unemployment, plant closures, bank failuresand political unrest.