HOW THE FED COULD EMPLOY QE AGAIN / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

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AUGUST 27, 2010, 4:44 P.M. ET.

How the Fed Could Employ QE Again .

By PETER EAVIS

Ben Bernanke's much-anticipated speech Friday didn't say much about unemployment. There may be a reason for that.

In his remarks, the Federal Reserve chairman came across as a sober-minded central banker who is prepared to act forcefully if the economy weakens. That force could come in the form of the Fed buying large amounts of bonds to help further lower borrowing costs, a policy that was used during the financial crisis and is sometimes labeled quantitative easing, or QE. While Mr. Bernanke did discuss expanding the Fed's bond holdings, he also suggested it wasn't yet necessary because economic growth looks likely to pick up next year.

But something could complicate that relatively rosy scenario. Even in a revived economy, the unemployment rate could stay stubbornly high. That could stoke political pressure for the Fed to make strong use of QE to reduce joblessness.

While the Fed's mandate is both to contain inflation and promote maximum employment, it typically talks with far more specificity about the "right" level of inflation. For instance, in his Friday speech, Mr. Bernanke said: "Recently, inflation has declined to a level that is slightly below that which [Federal Open Market Committee] participants view as most conducive to a healthy economy in the long run." His comments on employment levels were vague by comparison.

But the longer unemployment remains above 9%, the more politicians might push for clearer commitments from the Fed on joblessness, especially if there is little enthusiasm in Washington, D.C., for deficit spending to create jobs.

"Central bankers alone cannot solve the world's economic problems," Mr. Bernanke said Friday. But if unemployment doesn't come down fast, the more politicians will want the Fed to do just that. Get ready for QE as social policy.

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