JACKSON HOLE, Wyoming Federal Reserve Chairman Ben Bernanke has smoothed the ruffled feathers of anti-inflation hawks at the Fed by indicating he will only press for more policy easing if the U.S. economic slowdown worsens.
Getting that buy-in may eventually make it easier for Bernanke to rally the Fed to move more aggressively if it is clear that the recovery is stalling.
"The data is likely to do the work convincing more timid members" of the Fed's policy-setting committee, BNP Paribas economist Julia Coronado wrote in a note to clients.
Speaking on Friday at the Fed's annual conference in this mountain resort, Bernanke gave a detailed reading of the wilting economic outlook and a reminder of the weapons the Fed could use to bolster the recovery from the worst U.S. recession since World War Two.
It was a much more nuanced assessment than the statement released by the U.S. central bank on August 10 when it shifted policy by taking new measures to support the economy.
The Fed's move nearly three weeks ago to resume buying longer-term Treasury securities to hold its balance sheet steady, instead of allowing them to continue running off, was a controversial one within the bank's inner sanctum.
Some members of the policy-setting Federal Open Market Committee saw the change as sending a signal to markets that the Fed was closer to major new monetary easing than it was.
Some Fed officials question whether recent weakness in the U.S. economy is not merely a soft patch in a recovery that will eventually gather momentum rather than an early warning sign that growth will be too sluggish to support new job creation.
Critics of the move on the Fed's policy-setting panel are wary of further bloating a balance sheet that at $2.3 trillion is more than twice its pre-crisis levels, just to bring down unemployment by an incremental amount.
To the critics, the Fed sent a wrong signal on August 10 when it said it would resume buying Treasury bonds "to support the recovery."
Bernanke's speech has given some solace to the sceptics.
While acknowledging the slowdown, Bernanke said the preconditions for a pickup in growth in 2011 appear to remain in place.
"The chairman did not brace the nation for a 'double-dip'" recession, said Credit Suisse economist Dana Saporta.
Bernanke was also at pains to weigh the risks and benefits of any new Fed action, acknowledging that the exact impact of buying more Treasury debt is unknown, just as cutting the already minimal interest rate the Fed pays banks to park their cash at the central bank might help only a little.
"We took Bernanke's comments as consistent with our own view that there is a higher bar for further stimulus than seemed the case following the decision to maintain the size of the balance sheet at the August FOMC meeting," Barclays Capital economist Peter Newland said.
In addition, Bernanke spelled out that one of the factors that would guide the Fed would be a further fall in already low levels of inflation, raising the risk of deflation.
"It is worthwhile to note that, if deflation risks were to increase, the benefit-cost trade-offs of some of our policy tools could become significantly more favourable," he said.
To some economists, however, the pace of the U.S. recovery has already slipped into a lower gear, and Bernanke's speech portends further Fed action in the next few months.
"The overall tone was one of watch and wait, despite ongoing signs that U.S. economic activity has not only dropped below its potential growth rate but has a significant probability of weakening further," Goldman Sachs economist Jan Hatzius wrote in a research note.
By framing the conditions for any new move to head off the risk of a relapse into recession, Bernanke has likely made it easier to bring the full Fed along with him.
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