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Federal Reserve chief admits he is prepared to start third round of quantitative easing if US economy continues to flag Ratings agency Moody’s warned it might strip the US of its AAA rating just hours after the Federal Reserve chairman, Ben Bernanke, was poised to inject further funds into the US economy and commit to several years of low interest rates to combat flagging growth and prevent further rises in the unemployment rate. Bernanke said a third round of quantitative easing, called QE3, could be necessary if the economy fails to regain momentum in the second half of the year. Moody’s said it will review the federal government’s triple-A bond rating because the White House and Congress are running out of time to raise the nation’s $14.3tn borrowing limit and avoid a default. The US treasury says the government will default on its debt if the limit is not raised by 2 August. Moody’s said: “An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments.” Earlier in the day stock markets jumped as investors cheered the prospect of increased support from the Federal Reserve, with the Dow Jones industrial average increasing 150 points, or 1.2%, in morning trading. The FTSE 100 closed up 37 points at 5906. Bernanke said the Fed could launch another round of treasury bond-buying before the end of the year. He said it could also cut the interest it pays to banks on reserves held by the central bank as a way to encourage them to lend more. The Fed could also be more explicit about how long it planned to keep rates at a record low, which would give investors confidence about its efforts to continue supporting the economy. The Federal Reserve chairman’s warning came as Republicans and Democrats continued to wrangle over a package of measures to cut the government deficit and stimulate the economy. Republicans have favoured plans to curb spending and cut taxes, while Democrats have emphasised the need to maintain spending to boost the economy. Republicans, many of them Tea Party representatives, have attacked the Fed’s programme of quantitative easing as a chief cause of high inflation following a sharp rise in commodity prices. Bernanke has denied that low yields on Treasury bonds, brought about by his low interest rate policy and programme of bond buying, have encouraged investors to speculate on commodities in such numbers that they influence the price. Delivering his twice-yearly report to Congress, Bernanke said the central bank was prepared to provide additional stimulus if the current US economic slump persisted. He maintained that temporary factors, such as high food and petrol prices, had slowed the economy, and that growth should pick up when those factors ease in the second half of the year. If that forecast proved wrong, he said, the Fed was prepared to do more. “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support,” Bernanke told the House financial services committee, on the first of two days of testimony. In answer to critics of his policies, including some regional bank presidents, Bernanke conceded that inflationary pressures on energy and food might end up being more persistent than the Fed anticipated. He said the central bank would be prepared to start raising interest rates faster than currently contemplated if prices did not moderate. The Fed has kept its key interest rate at almost zero since December 2008. Most City economists believe it will not start raising them until next summer and some believe rates will not be raised until 2013. Bernanke was testifying after the US government released a dismal jobs report last week. The world’s largest economy added just 18,000 jobs last month, the smallest increase in nine months. And the May figures were revised downward to show just 25,000 jobs added, fewer than half of the number initially reported. The unemployment rate rose to 9.2%, the highest this year. Companies pulled back sharply on hiring after adding an average of 215,000 jobs per month from February to April. The economy typically needs to add 125,000 jobs per month just to keep up with population growth. And at least twice that many jobs are needed to bring down the unemployment rate. At the June meeting, the central bank lowered its economic growth forecast for the second half of the year and said unemployment would not fall below 8.6% this year. The Fed also agreed at that meeting to end, on schedule, its programme to boost the economy through the purchase of $600bn in Treasury bonds. US economy Quantitative easing Ben Bernanke Economics Interest rates United States Phillip Inman guardian.co.uk