Bernanke: Fed stimulus will adapt to economy

Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee the economy still needs help from the Fed. (The Washington Post)
July 17, 2013

Federal Reserve Chairman Ben S. Bernanke said Wednesday that the central bank will adapt its stimulus efforts to the state of the economy, an attempt to reassure investors and the public that it will not let recovery veer off track.

Appearing before the House Financial Services Committee, Bernanke emphasized the flexibility of Fed policies. Although the Fed has said it anticipates scaling back its $85 billion-a-month stimulus program later this year, Bernanke said that timeline could change if the economy stumbles.

If the labor market loses momentum or inflation remains too low, the Fed could keep buying long-term bonds to support the recovery, he said. Bernanke also cited tighter financial conditions — mortgage rates have risen by half a percentage point over the past two months — as a factor that could alter the Fed’s plans.

“I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Bernanke said in his testimony.

Bernanke also pointed out that the Fed intends to hold onto the bonds for some time — perhaps even until they mature. That would provide an extra boost to the economy even after the Fed stops purchasing new bonds, he said. And the Fed will keep its benchmark interest rate low for “an extended period” after it stops buying bonds. Most central bank officials do not believe the first rate increase will occur until 2015.

The Fed has committed to keeping short-term interest rates near zero at least until the unemployment rate reaches 6.5 percent or inflation hits 2.5 percent. Bernanke emphasized that rates could remain unchanged even after those conditions are met. The central bank will only consider acting at those points, not necessarily making a move.

“A highly accommodative monetary policy will remain appropriate for the foreseeable future,” Bernanke said.

The statement knocks down proposals by two Fed officials over the past week who have been critical of the central bank’s policies. Philadelphia Fed President Charles I. Plosser and Kansas City Fed President Esther L. George pushed for raising interest rates as soon as the unemployment or inflation conditions are met.

“Effective forward guidance demands commitment,” Plosser said in a recent speech, calling the Fed’s approach merely “vague promises.”

Investors seemed content with Bernanke’s message Wednesday — stock markets opened slightly higher on his testimony and were virtually unchanged by the close of trading. The muted response was a marked change from the last time Bernanke appeared before Congress, when the Dow Jones industrial average swung almost 300 points within a few hours.

Investors have been on tenterhooks over the Fed’s plan for reducing bond purchases. Yields on Treasury bonds have risen to the highest level in two years, pushing mortgage rates up half a percentage point in recent weeks.

On Wednesday, Bernanke attributed part of the increase in interest rates to an improving economy and the unwinding of some speculative trades. He noted that higher mortgage rates do not seem to have had an effect yet on the real estate market but that the Fed is watching the sector closely.

Bernanke also acknowledged that the Fed may have contributed to some confusion among investors and the public. The central bank is led by 19 officials, and Bernanke has welcomed open debate among them. But he defended the Fed’s guidance on bond purchases.

“I think the markets are beginning to understand our message,” Bernanke said.

The Fed chairman provides updates to Congress twice a year, and Bernanke is slated to testify before the Senate on Thursday. The appearance could well be his last; Bernanke is not expected to stay on after his term ends in January.

Lawmakers on Wednesday assumed as much, effusively thanking Bernanke for his service and leadership during the financial crisis.

“I suspect that history will record at a very perilous point in our nation’s economic history that you acted boldly and decisively, creatively — very creatively, I might add— and kept your head,” said Rep. Jeb Hensarling (R-Tex.), chairman of the Financial Services Committee.

Rep. Carolyn B. Maloney (D-N.Y.) summarized his tenure more succinctly: “You have never been boring.”

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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