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RISMEDIA, October 19, 2010—(MCT)—Federal Reserve Chairman Ben S. Bernanke, citing the threat of prolonged high unemployment and an economy potentially falling into a dangerous deflationary spiral, Friday laid out a case for the central bank to buy more U.S. government bonds in a bid to bolster growth.

But in a much-anticipated speech in Boston, Bernanke also made it clear that there were long-term risks—for the economy and the Fed’s credibility—in cranking up the electronic printing press and pumping hundreds of billions of dollars into the financial system. And his remarks seemed to plant seeds of doubt among some economists that the purchases would not be as big as many had hoped, raising the question of just how much another round of Treasury purchases will help the economy.

“We have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public,” Bernanke said at a conference sponsored by the Federal Reserve Bank of Boston.

As Bernanke spoke, the government released statistics showing the so-called core inflation rate, which excludes volatile energy and food prices, was unchanged in September and is now running at an annual rate of 0.8%—well below the Fed’s informal target of 1.5-2%. Separately, there was better-than-expected news on last month’s retail sales activity as total sales rose 0.6% from the prior month, boosted by higher auto sales.

Bernanke said in his speech that the “preconditions for a pickup in growth next year remain in place,” indicating improvements in household finances, solid business investments and a recovery in state and local tax revenues.

But the Fed chief also pointed to the troubled housing market and the slow rate of private-sector job growth, which dampens consumer spending and poses risks for the sustainable growth of the whole economy. And while economic growth is expected to be stronger next year, he said, the economy isn’t likely to expand fast enough to bring down the unemployment rate quickly.

Analysts widely expect the Fed to announce a plan to buy Treasury purchases, a program known as quantitative easing, at the conclusion of its next policymakers’ meeting on Nov. 2 and 3. While Bernanke didn’t say how much it would buy and over how long—the Fed previously bought $1.75 trillion of Treasury and mortgages to help lift the economy out of recession—economists are expecting an amount of at least $500 billion.

The hope is that the purchases would juice up the economy by further lowering long-term rates, thus helping more homeowners refinance and businesses borrow at cheaper rates. And indirectly, the Fed’s purchases could weaken the dollar, giving a boost to U.S. exporters who could then sell their goods at a lower cost in overseas markets.

But some analysts doubt that the central bank’s action next month will deliver a big punch. Expectations of the probable Fed action have already boosted stock prices, lowered rates and depressed the dollar, and it’s unclear how much more they’ll react to the Fed move.

Economists at Moody’s Analytics estimated that anticipation of the Fed’s quantitative easing had reduced 10-year Treasury yields by 0.30 points, lowered the value of the dollar by about 5% and lifted stock prices by a similar amount.

Overall, Moody’s said its models suggest that the Fed action may boost real gross domestic product growth by about 0.15 percentage points in 2011, which translates into a quarter million additional jobs and a reduction of 0.2 percentage points in the unemployment rate, now at 9.6%.

“It’s better than nothing, but it’s not going to make a huge difference,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

Michael Fratantoni, vice president of research at the Mortgage Bankers Association, said mortgage rates hit historical lows last week, falling to 4.2% for a 30-year fixed rate mortgage. He expects average rates to rise from now, climbing all the way up to about 5% in the middle of next year. He noted that after Bernanke’s speech that the 10-year Treasury yields shot up 0.15 percentage points, reflecting concerns about the magnitude of the Fed’s action.

Even if mortgage rates held at 4.2%, it won’t help homeowners like Kenneth Bernardo of Fort Collins, Colo.

“So far it’s not made sense,” said the mental health therapist. Because his property value dropped by so much during the recession, he said, “I can refinance and get a lower rate, but my monthly payment would go up.”

Bernardo, who works two jobs, one full-time and another part-time, is glad that stock prices have risen lately, but he isn’t about to go on a shopping spree, either. Like many others his age, he’s in a deep savings mode after having watched the value of his retirement accounts plunge during the recession. His plan is to retire when he turns 70 1/2, whereas before he was looking at 67.

The benefit to businesses also isn’t assured. Some small manufacturers say a cheaper dollar will clearly help, especially when it comes to competing against Chinese businesses that have long enjoyed the extra advantage of an undervalued Chinese currency. But many U.S. exporters, big corporations as well as smaller firms, are so integrated into the global economy that the picture isn’t so clear.

Take Aquatec Water Systems Inc. of Irvine, Calif. The company makes pumps and other products for agriculture, automotive and other industries. Its chairman, Ivar Schoenmeyr, says sales are up 35% this year from a year earlier. He’s hired about 20 assemblers and two engineers over the last two years, and now has about 100 employees.

Although Aquatec assembles products in Irvine, Schoenmeyr buys raw components in China and also maintains tooling capabilities in China just in case he needs additional work. If the dollar weakens, he would benefit by selling more of his products to China, but he would also pay more for supplies and labor he buys from there.

“It would be a little bit of a wash,” he said.

The potential of a limited result from quantitative easing has some Fed officials reluctant to make the move. And some policymakers worry that injecting hundreds of billions of dollars into the financial systems may eventually lead to much higher consumer prices down the road and undermine the central bank’s credibility as an inflation fighter.

But even as Bernanke acknowledged such concerns, the Fed chief pointed to the risks of deflation—a broad decline in prices and wages that has devastated Japan—and an economy still hobbling from the still-depressed housing market and feeble private-sector job growth.

In that climate and with little chance of new major fiscal stimulus coming to support the economy, analysts say, Bernanke and his colleagues know they are falling short on both of the Fed’s objectives—maximizing employment and maintaining price stability.

“It seems to me they have to try to do something,” said Lyle Gramley, a former Fed governor.

(c) 2010, Tribune Co.

Distributed by McClatchy-Tribune Information Services.