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Fed Chairman Reaffirms Stimulus and Warns Congress Over Cuts Fed Chief Reaffirms Fervor for Stimulus
(about 7 hours later)
WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, sharpened his insistence Wednesday that the Fed remains committed to its economic stimulus campaign and that it did not intend to signal it was lowering its sights in recent weeks. WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, emphasized on Wednesday that the central bank remains committed to bolstering the economy, insisting that any deceleration in the Fed’s stimulus campaign will happen because it is achieving its goals, not because it has lowered its sights.
Mr. Bernanke said that the Fed expected the economy to gain strength in the coming months, potentially allowing the Fed to decelerate its stimulus campaign not because it has changed its goals but because it has begun to achieve them. Mr. Bernanke said he still expected to reach that point in the coming months but, in what may have been his final appearance before the House Financial Services Committee, he cautioned that Congress itself posed the greatest risk to growth.
But he warned that Congress itself remains the greatest obstacle to faster growth. Federal spending cuts are reducing growth this year by about 1.5 percentage points, he said. While the Fed expects the impact to diminish next year, he said there was a risk Congress would create new problems for the economy. “The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he told the committee.
“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” Mr. Bernanke said during a biannual appearance before the House Financial Services Committee. The sluggish economy has been a constant background for Mr. Bernanke’s biannual testimony. Unemployment, at 7.6 percent, remains stubbornly above the Fed’s goals. Inflation has sagged to the lowest pace on record. Growth continues at a “modest to moderate pace,” the Fed said Wednesday in its monthly beige book survey of economic conditions across the country, released separately from Mr. Bernanke’s testimony.
Wednesday may have marked the last time that Mr. Bernanke will appear before the committee to report on the Fed’s conduct of monetary policy. He will conclude his second term as chairman at the end of January and is widely expected to step down. Members of both parties took the opportunity to praise him, although Republicans generally added that they opposed the Fed’s recent efforts. Mr. Bernanke’s message on Wednesday was that the Fed would cut back on its monthly asset purchases — $85 billion of mortgage-backed securities and Treasury securities — only if conditions were improving. If unemployment instead stays high and growth rates do not improve, the Fed will keep buying bonds. If inflation stays low, the Fed will keep buying bonds. If longer- term interest rates go up, the Fed will keep buying bonds.
“You acted boldly and decisively and creatively – very creatively, I might add,” said the committee’s chairman, Texas Republican Jeb Hensarling. Mr. Bernanke revived a talking point from earlier this year, insisting the Fed was willing to buy more than $85 billion a month. “Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Mr. Bernanke told the committee.
“You have never been boring,” said New York Democrat Carolyn Maloney. Even as Mr. Bernanke said that the Fed would keep its options open, he continued to suggest that the Fed would like to start reducing its asset purchases this year and then end them as soon as possible. If the economy needs more stimulus, the Fed would prefer to extend its policy of holding short-term interest rates near zero. Mr. Bernanke, who refers to this shift as “a change in the mix of tools,” has not explained the rationale and was not asked to do so.
Mr. Bernanke then did his very best to be boring, sending the message to markets that had been roiled by his comments last month that it was much ado about nothing. The Fed’s course will not be determined by Mr. Bernanke much longer. He is widely expected to step down as Fed chairman at the end of his second term in January. Members of both parties took the opportunity to praise him, although Republicans generally added that they opposed the Fed’s recent efforts. No one paid much attention to the finger Mr. Bernanke had pointed at them.
The shabby condition of the economy has become the constant background for Mr. Bernanke’s public appearances. Unemployment remains stubbornly common, inflation has sagged to the lowest pace on record and growth is tepid. “You acted boldly and decisively and creatively — very creatively, I might add,” said the committee’s chairman, Jeb Hensarling, Republican from Texas.
Mr. Bernanke’s message Wednesday was that the Fed will begin to decelerate only if those problems continue to diminish. If unemployment stays high, the Fed will keep buying bonds. If inflation stays low, the Fed will keep buying bonds. If growth weakens, the Fed will keep buying bonds. Indeed, he revived a talking point from earlier this year in insisting that the Fed was willing to increase the volume of its monthly purchases if it decided that more stimulus was necessary. “You’ve had a lot of compliments today. In my business it’s called a eulogy,” said Emanuel Cleaver, a Missouri Democrat, who is an ordained minister.
“Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Mr. Bernanke told the committee. “You have never been boring,” said Carolyn Maloney, a New York Democrat.
Mr. Bernanke has adopted a stronger tone in particular on the subject of inflation. Fed officials insisted for much of the year that they were not concerned about the sagging pace of inflation, which has fallen to the lowest pace on record. Prices increased by just 1 percent during the 12 months that ended in May, well below the 2 percent pace that the Fed considers most healthy. In recent weeks, the Fed has shifted its tone, emphasizing that it wants prices to rise more quickly. Mr. Bernanke then did his best to be boring, sending the message to markets roiled by his comments last month that it was much ado about nothing.
On Wednesday Mr. Bernanke put inflation alongside unemployment as the reasons for the Fed’s commitment to its stimulus campaign: “Our intention is to keep monetary policy highly accommodative for the foreseeable future,” he said, “because inflation is below our target and unemployment is quite high.” Markets purred. The yield on the benchmark 10-year Treasury bond sank slightly, falling below 2.5 percent, while stock markets posted modest gains.
The central bank says it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. It also is expanding its holdings of mortgage-backed and Treasury securities by $85 billion a month in an effort to accelerate the pace of employment growth. The announcement last month that the Fed expected to reduce its asset purchases later this year drove up interest rates on mortgages and other loans. Some investors concluded that the Fed was curtailing its ambitions for the recovery, while others saw evidence that the Fed was overly optimistic in its forecasts.
Mr. Bernanke repeated his comments earlier this month that the Fed is considering “changing the mix of tools” by reducing the pace of asset purchases later this year, but at the same time suggesting it will extend the duration of near-zero rates. He said that this plan enjoyed “good support” from other Fed officials. Mr. Bernanke described that response as “unwelcome,” but he said it had probably reduced some “excessively risky or leveraged positions” — easing concerns among some Fed officials that its efforts are pumping up new bubbles.
He also emphasized that such a cut was not a foregone conclusion. He added that initial confusion about the Fed’s plans appeared to have been replaced by a new equilibrium of slightly higher interest rates. “I think the markets are beginning to understand our message,” Mr. Bernanke said.
“If the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions — which have tightened recently — were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer,” Mr. Bernanke said in his prepared remarks. And he downplayed concerns that the recent rate increases had undermined economic activity. “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates,” he said.
His likely departure, however, means that his credibility increasingly depends on convincing investors that the rest of the Fed’s policy-making committee shares his views and is committed to maintaining the same policies even if he departs. Analysts said that the strongest new signal Mr. Bernanke delivered in recent weeks concerned the sluggish pace of inflation. Prices rose just 1 percent during the 12 months ending in May, well below the 2 percent pace that the Fed considers healthy. Fed officials insisted for much of the year that inflation would rebound from the lowest pace on record. In recent weeks, the Fed has emphasized that it will take action if inflation does not. On Wednesday, Mr. Bernanke put inflation alongside unemployment as the justification for the Fed’s continuing efforts.
That task has been complicated by the fragmentation of the committee’s views about asset purchases. About half of the 19 officials who participate in meetings of the Fed’s policy-making committee indicated before the committee’s most recent meeting last month that they expected an end to asset purchases later this year, while the rest – including Mr. Bernanke – see a need for purchases into 2014. “Our intention is to keep monetary policy highly accommodative for the foreseeable future, and the reason that’s necessary is because inflation is below our target and unemployment is still quite high,” Mr. Bernanke told the committee.
The announcement last month that the Fed expects to reduce its asset purchases later this year drove up interest rates on mortgages and other loans. Some investors concluded that the Fed was curtailing its ambitions for the recovery, while others saw evidence that the Fed was overly optimistic in its forecasts. Michael Feroli, chief United States economist at JPMorgan Chase, noted that Mr. Bernanke also cited the risk of deflation, something he had not done for several years. “The mention of deflation risks, rather than just low inflation, is a fairly strong statement coming from a sitting central bank chief,” Mr. Feroli wrote.
Mr. Bernanke described that response as “unwelcome,” but he added that it had likely reduced some “excessively risky or leveraged positions” – easing concerns among some Fed officials that its efforts were seeding new bubbles. Mr. Bernanke also emphasized that the Fed would not be satisfied with a decline in the unemployment rate if it was driven by people giving up the search for work rather than people finding new jobs. Importantly, he described this as a reason the Fed might extend its policy of low interest rates but not asset purchases.
He downplayed concerns that the recent rate increases had undermined economic activity. “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates,” he said. The Fed has said that it plans to hold short-term rates near zero at least as long as the unemployment rate remains above 6.5 percent, but Mr. Bernanke has made clear in recent weeks that the Fed is likely to maintain the policy well beyond that threshold so long as inflation remains under control. He said on Wednesday that he believed that the unemployment rate could be cut to around 5.6 percent without causing prices to rise outside the Fed’s preferred range.
His likely departure, however, means that his credibility increasingly depends on convincing investors that the rest of the Fed’s policy-making committee shares his views and is committed to maintaining the same policies. That task has been complicated by the fragmentation of the committee’s views about asset purchases. About half of the 19 officials who participate in meetings of the Fed’s policy-making committee indicated before the committee’s most recent meeting last month that they expected asset purchases to end later this year, while the rest — including Mr. Bernanke — saw a need for purchases into 2014.
Mr. Bernanke said Wednesday that his preferred timetable enjoyed “good support” from the committee, but it has not been codified in a policy statement.