Bernanke & QE3: Here's What You Need to Know

Chairman Ben Bernanke sent a clear message Friday that the Federal Reserve will do more to "help" the still-struggling U.S. economy. His remarks seemed to leave two questions: What exactly will the Fed do? And when?

It’s no longer a matter of "if." It’s going to happen.

Echoing what the Fed said in a statement after its last policy meeting July 31-Aug. 1, the chairman said they would act further, as needed, to stimulate economic growth and job creation.

He called the weak job market "a grave concern" that causes "enormous suffering," wastes talent and can inflict lasting damage on the economy. Bernanke also described the U.S. economy's health as "far from satisfactory" and noted that the unemployment rate, now 8.3 percent, hasn't declined since January.

He stopped short of committing the Fed to any specific move. But in his speech to an annual Fed conference in Jackson Hole, Wyo., Bernanke said that even with interest rates already at super-lows, the Fed should do more to "help" the economy.

"From our reading of the speech, it appears that Bernanke has given up on the idea of Congress stepping up and taking care of its business, which means he thinks the 'fiscal cliff' will remain an issue through the November election and likely right up to the end of the year,” writes Paul Vigna for the Wall Street Journal.

"The drag on the economy will only get worse the longer that hangs around, and that’s apparently unacceptable to the Fed chieftain," Vigna adds.

Some economists predict the Fed will unveil a new plan as soon as its Sept. 12-13 meeting, possibly a third round of bond purchases meant to lower long-term interest rates and encourage more borrowing and spending (i.e. "quantitative easing," or QE).

In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round -- a QE3. Others expect something less dramatic: a plan to keep short-term rates near zero into 2015 unless the economy improves, perhaps followed by bond purchases later.

In his speech, Bernanke assessed the economy's weaknesses, defended the steps the Fed has taken to date, and insisted it can do more.

Investors took time to digest Bernanke's speech but in the end seemed pleased. After his remarks were released at 10 a.m. Eastern time, the Dow Jones industrial average shed some of its earlier gains. Then it rose more than 100 points. It closed up nearly 91 points, or 0.7 percent.

Bernanke acknowledged that the Fed is operating in essentially uncharted territory. Central banks can take "nontraditional" measures when they've run out of conventional ammunition. And under Bernanke the Fed has tried many.

It's made its public communications more explicit. For example, it's sought to embolden investors and businesses by saying short-term rates will stay low as long as the economy is weak. The Fed originally said it expected to keep rates "exceptionally low" through mid-2013. It extended that target to late 2014.

And besides embarking on two rounds on QE, the Fed has sold short-term Treasurys and replaced them with long-term Treasurys. That shift is intended to push long-term rates down further.

Bernanke argued Friday that collectively, such measures have succeeded. He cited research showing that two rounds of QE had created 2 million jobs and accelerated U.S. economic growth.

However, even if the Fed does act further, many analysts doubt it would make much difference. Interest rates, both short- and long-term, are near historic lows. Borrowing -- for those who have the credit -- has never been cheaper. Yet the economy remains in a rut.

Critics have also argued that besides escalating inflation later, the Fed's easy-money policies could push individuals and institutions into riskier investments. That, in turn, could destabilize the financial system.

Bernanke conceded that nontraditional policies carry risks. But he argued that these risks are "manageable."

A third round of quantitative easing "seems like a done deal, and the market is trading it that way. So the timing, while interesting, isn’t really very relevant beyond the whole trading-opportunity game," Vigna notes

Follow Becket Adams (@BecketAdams) on Twitter

The Associated Press contributed to this report.