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Chairman Ben Bernanke said Wednesday that the Federal Reserve is open to another round of bond purchases to lower long-term interest rates and boost growth if the job market doesn't improve.
"If we don't see further improvement in the labor market, we will be prepared to take additional steps if appropriate," Bernanke said at a news conference after the Fed's two-day policy meeting.
The Fed agreed at its meeting to extend a program to swap short-term bonds for longer-term bonds through the end of the year. That doesn't expand the Fed's portfolio. But it still puts downward pressure on long-term rates, which helps encourage more borrowing and spending.
Still, Bernanke said the Fed would consider expanding its portfolio with a third major round of bond purchases, if the outlook for hiring doesn't' pick up. Such purchases would lower rates even further.
The Fed has completed two such programs, known as quantitative easing, since the start of the Great Recession. It bought more than $2 trillion in Treasury bonds and mortgage-backed securities, expanding its portfolio to more than $2.8 trillion.
"Additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy," Bernanke said.
Investors seemed disappointed that the Fed didn't take such action after its meeting. Stocks had been mostly flat before the news conference started. They fell sharply after Bernanke started answering questions.
The U.S. economy looks weaker than it did when the Fed last met in April. Growth was more sluggish in the first three months of the year than first estimated.
Job growth averaged only 73,000 in April and May, after average gains of 226,000 a month in the first three months of the year. And the unemployment rate rose in May to 8.2 percent from 8.1 percent in April.
In its updated quarterly forecast, the Fed lowered its prediction for growth in 2012 to 2.4 percent, a half percentage point weaker than its previous forecast in April.
And the Fed said it doesn't expect the unemployment rate to fall lower than 8 percent.
Still, Bernanke rejected a suggestion that the Fed has limited options left to boost growth. But he said that Fed actions were "not a panacea" for an ailing economy, a point he's previously made. The Fed would welcome action by Congress and the administration, he said.
Bernanke was asked about criticism from GOP presidential candidate Mitt Romney, who has said that the Fed's last round of bond purchases had little success.
Bernanke disagreed. He said the purchases boosted growth and removed the threat of deflation, a period of falling prices that the United States last experienced during the Great Depression of the 1930s.
He also said Europe's debt crisis has affected the U.S. economy. But he said U.S. policymakers were taking steps to make sure financial institutions could withstand any shocks from the region. He specifically mentioned recent stress tests conducted on America's largest banks.
"It is important to be prepared for any further problems that might emerge from Europe," Bernanke said.