US unemployment merits third round of money printing, says Bernanke

The US needs more quantitative easing, despite the improving economic outlook, because unemployment remains too high, America’s central bank boss said, as he warned that looming budget cuts could derail the recovery.

Ben Bernanke, chairman of the US Federal Reserve, defended the decision to launch a third round of QE by telling US politicians that the benefits still outweighed the risks.

He was speaking shortly after Sir Mervyn King, Governor of the Bank of England, told an audience in Japan that monetary policy was “not a panacea” for economic problems and repeated his warning that, “as time passes, larger and larger doses of stimulus are required”.

Mr Bernanke said policymakers were aware of the risks from QE3, which was launched at the end of last year, including potential problems with unwinding the programme and rising inflation, but he claimed they were not material at the moment. “To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” he told the Senate Banking Committee.

The Fed is currently buying $85bn (£57bn) in bonds each month under QE3, having already acquired $2.5 trillion, and plans to keep purchasing assets until it sees a sharp improvement in unemployment. However, the policy has divided Fed members, some of whom are concerned about the potential risks.

Mr Bernanke also urged US politicians to avoid sharp spending cuts set to come into effect on Friday, which amount to a new “fiscal cliff”. He warned that they could combine with earlier tax increases to create a “significant headwind” for the economic recovery.

“The Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration [spending cuts] with policies that reduce the federal deficit more gradually,” he said.

Central banks’ new found appetite for QE has sparked fears that countries are embarking on a fresh round of currency wars to gain an advantage in global trade. In the UK, Sir Mervyn was one of three policymakers to have voted to increase QE by £25bn to £400bn this month.

Paul Fisher, the Bank’s executive director of markets who voted in line with Sir Mervyn, yesterday revealed that he planned the £25bn to be “the first instalment of a more prolonged run of purchases at a somewhat slower pace than previously, and with a relatively modest addition to the total by the end”.

Speaking in Japan, which has had to defend itself against attacks that its most recent QE programme is an attempt to debase the yen, Sir Mervyn dismissed fears of a currency war. “[Monetary policy] may push down the exchange rate a little bit, which makes life more difficult for other countries, but it increases total domestic spending at home, which will increase demand for imports from those emerging market economies,” he said.

Separately, Paul Tucker, the Bank’s deputy governor, told MPs in the UK that the risks of a global currency war were “low”.