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Course for bond rollbacks unclear

By The Associated Press
Wednesday, July 17, 2013, 7:15 p.m.
 

WASHINGTON — Chairman Ben Bernanke said Wednesday that the Federal Reserve's timetable for reducing its bond purchases is not on a “preset course,” and the Fed could increase or decrease the amount based on how the economy performs.

Bernanke told lawmakers that the job market has made some progress since the Fed began buying $85 billion a month in bonds in September, as part of his midyear economic report to Congress. And he repeated his belief that the Fed could slow that pace later this year if the economy strengthens.

But Bernanke cautioned that the Fed wants for there to be substantial progress in the job market before scaling back the bond purchases. If conditions worsen, the Fed could maintain its current pace or even increase it. The bond purchases are intended to keep long-term interest rates low and encourage borrowing and spending.

“Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” he told the House Financial Services Committee. It's the first of two days of testimony this week on the Fed's semi-annual report.

Bernanke said that a number of factors could influence the Fed's thinking. U.S. economic growth could be restrained further by a weaker global economy or federal spending cuts and tax increases. Inflation could remain well below the Fed's 2 percent target. And the unemployment rate could drop because people are leaving the workforce — not because they are getting jobs.

Paul Dales, senior U.S. economist for Capital Economics, said Bernanke's comments did not alter his view that the Fed would likely start reducing its bond purchases in September and end them completely by the middle of next year. But Dales said this would be contingent on how the economy performs.

“We don't think this forward guidance could be much clearer,” Dales said.

Bernanke's remarks expanded on the statements he and other Fed officials have made in recent weeks to try to calm turbulent markets.

The Dow Jones industrial average plunged by 560 points in the two days after Bernanke's initial comments at a news conference following the Fed's June meeting. Since then, various Fed officials have tried to assure investors that the Fed's timetable is based on economic performance — not a calendar date. That's helped to restore investor confidence, and the Dow and other market indicators have climbed to new highs.

Hiring has improved since the Fed's bond buying began. Employers have created an average of 202,000 jobs a month this year, up from 180,000 in the previous six months.

Still, unemployment remains elevated at 7.6 percent, and economic growth has been modest the past three quarters.

In his testimony, Bernanke again said “a highly accommodative monetary policy will remain appropriate for the foreseeable future” because unemployment remains high and inflation is below the Fed's target of 2 percent.

Bernanke also repeated that the Fed plans to keep its benchmark short-term interest rate near zero as long as unemployment is above 6.5 percent. But Bernanke said the Fed could hold the rate lower even after it falls below 6.5 percent, particularly if unemployment falls because more people are leaving the workforce.

 

 
 


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