Federal Reserve Chairman Ben S.
Bernanke said the central bank’s asset purchases “are by no means on a preset
course” and could be reduced more quickly or expanded as economic conditions
warrant.
“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,” the 59-year-old Fed chairman said today in prepared
testimony before the House Financial Services Committee.
If the economy improved faster
than expected, and inflation rose “decisively” back toward the central bank’s 2
percent target, “the pace of asset purchases could be reduced somewhat more
quickly,” he said. The committee would also be prepared to increase the pace of
purchases “for a time, to promote a return to maximum employment in a context
of price stability.”
The Fed chairman’s remarks
highlight the Federal Open Market Committee’s desire to assure that the economy
and labor markets have sufficient momentum before reducing its $85 billion in
monthly bond purchases. An increase in borrowing costs since the chairman first
started discussing tapering purchases threatens to slow the four-year
expansion.
Treasuries and stock futures rose
after the testimony was released. The yield on the 10-year Treasury note fell
to 2.51 percent at 8:37 a.m. in New York from 2.55 percent before the
testimony. Futures on the Standard & Poor’s 500 Index expiring in September
rose 0.2 percent to 1,674.40.
‘Sustained Improvement’
The yield on the 10-year note
rose as high as 2.74 percent this month from 1.93 percent on May 21, the day
before Bernanke said the Federal Open Market Committee may trim its bond buying
in its “next few meetings” if officials see signs of sustained improvement in
the labor market.
Bernanke today also said that the
Fed’s balance sheet would remain elevated after purchases of mortgage bonds and
Treasuries end. The Fed “will be holding its stock of Treasury and agency
securities off the market and reinvesting the proceeds from maturing
securities,” Bernanke said. The strategy “will continue to put downward
pressure on longer-term interest rates, support mortgage markets, and help to
make broader financial conditions more accommodative.”
Assuring Investors
Policy makers, including
Bernanke, have tried to assure investors that the Fed will hold down the
benchmark interest rate after ending bond buying. Bernanke, in an appearance in
Cambridge, Massachusetts on July 11, said “highly accommodative
monetary policy for the foreseeable future is what’s needed in the U.S.
economy,” a message he repeated today.
Even so, the average 30-year
fixed rate mortgage has risen to 4.51 percent as of July 11 from 3.51 percent
two months ago, according to Freddie Mac.
The FOMC said in a June 19
statement that keeping the federal funds rate between zero and 0.25
percent “will be appropriate at least as long” as unemployment remains above
6.5 percent and the forecast for inflation in one to two years doesn’t exceed
2.5 percent. The chairman again took pains today to explain that the Fed will
look beyond the unemployment rate to assure that labor markets are improving
before deciding on interest rates.
“For example, if a substantial
part of the reductions in measured unemployment were judged to reflect cyclical
declines in labor force participation rather than gains in employment, the
committee would be unlikely to view a decline in unemployment to 6.5 percent as
a sufficient reason to raise its target for the federal funds rate,” he said.
Increases in the benchmark lending rate “are likely to be gradual” when they
happen, he said.
Aggressive Easing
Bernanke, seeking to help
unemployed Americans find work, has orchestrated the most aggressive easing in
the central bank’s 100-year history, expanding its balance sheet to $3.5
trillion from $869 billion since August 2007. He said last month the FOMC may
begin tapering bond purchases “later this year” and halt the program around
mid-2014 if the economy performs in line with the Fed’s forecasts.
In today’s testimony, the Fed
chairman described labor markets as “far from satisfactory, as the unemployment
rate remains well above its longer-run normal level, and rates of
underemployment and long-term unemployment are still much too high.”
‘Risks Remain’
While risks to the economy have
diminished since late last year, Bernanke said, “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.”
The slow pace of the recovery
means that it remains “vulnerable to unanticipated shocks, including the
possibility that global economic growth may be slower than currently
anticipated.”
Fed officials estimate the 6.5
percent unemployment threshold could be reached by the end of next year. That
outlook is based on estimated growth of 3 percent to 3.5 percent for the
economy in 2014, according to the committee’s June central tendency estimates,
which are higher than the 2.9 percent estimate of private forecasters in a
Bloomberg survey.
Bernanke and policy makers have
had to gauge how much government spending cuts and higher tax rates are sapping consumer
confidence and growth. JPMorgan Chase & Co. economists estimate that
an expiration of tax breaks could reduce take-home pay this year by more than
$100 billion.
Retail Sales
Retail sales climbed 0.4 percent
last month, about half of what economists forecast, and the figures showed
households are replacing outdated vehicles and furnishing new homes while
cutting back on electronics and meals outside the home.
“The consumer is under pressure,”
said Bob Sasser, chief executive officer of Chesapeake, Virginia-based discount
retailer Dollar Tree Inc. “They’re now facing higher taxes,” a weak job market,
“and the uncertainty around the economy,” Sasser told analysts and investors on
a conference call in May.
The U.S. faces a “very
troublesome and challenging recovery,” Kendall J. Powell, chairman and chief executive
officer of Minneapolis-based General Mills Inc., said in a June 26 conference
call with shareholders and analysts.
Housing Rebound
Still, Fed stimulus has helped
fuel a housing-market rebound and this year’s 17.5 percent surge in the
Standard and Poor’s 500 Index of stocks.
The job market has also shown
some signs of recovery. Non-farm payrolls have expanded on average by around
200,000 jobs per month from January through June. The proportion of unemployed
workers who have been without a job for six months or more has fallen to less
than 37 percent from about 40 percent when Bernanke launched the third round of
quantitative easing in September.
“We are seeing steady
improvement” in the economy, Powell of General Mills said.
Slack in the labor market,
including 7.6 percent unemployment last month, helped keep inflation for the 12
months ending May a full point below the Fed’s 2 percent goal, reducing the
odds of any tightening based on that measure. the participants on the FOMC. In
December, when the committee expanded the program of $40 billion in monthly
buying of mortgage bonds with purchases of $45 billion of Treasuries, about
half of FOMC participants wanted to halt the stimulus around the middle of this
year, according to minutes from the meeting.
After a March staff presentation
on the costs and benefits of the program, “many” participants called for
slowing the pace of purchases over the next several meetings if labor markets
continued to improve. By the June 18-19 meeting, “about half” of the
participants “indicated that it likely would be appropriate to end asset
purchases late this year,” according to meeting minutes.
The language suggests that
concern over the risks from the program extends beyond the four Fed regional
bank presidents who have publicly spoken out against it: Esther George of
Kansas City, Jeffrey Lacker of Richmond, Richard Fisher of Dallas and
Charles Plosser of Phildelphia.
George, the only one of the four
presidents with an FOMC vote this year, has dissented against additional
stimulus at all four meetings this year. In June she cited the “risks of future
economic and financial imbalances” and the possibility long-term inflation
expectations may rise.
Bernanke’s comments to the House
today and Senate tomorrow may be his final semi-annual testimony. His second
four-year term expires in January. While Bernanke has declined to describe his
plans, President Barack Obama said last month the Fed chairman has
stayed in his post “longer than he wanted.”
By Craig Torres & Joshua Zumbrun - Bloomberg