The Federal Reserve’s monetary stimulus is helping the US economy recover but the central bank needs to see further signs of traction before taking its foot off the gas, Fed Chairman Ben Bernanke said yesterday.
In testimony that offered no sign that he is ready to retreat from the Fed’s latest round of bond buying, Bernanke emphasised the high costs of unemployment and inflation that continues to run below the Fed’s target.
“Monetary policy is providing significant benefits,” Bernanke told the congressional Joint Economic Committee, citing strong consumer spending on autos and housing, as well as increases in household wealth.
“Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed’s) 2% longer-run objective.”
Bernanke’s remarks helped lift US stock prices and further drove up prices for US government bonds.
Bonds had found support earlier from comments from the head of the New York Federal Reserve Bank that suggested the Fed would not consider trimming its bond-buying stimulus for several months.
The central bank is currently buying $85bn in Treasury and mortgage bonds each month in an effort to keep borrowing costs low and encourage investment, hiring and economic growth. It is the third round of asset purchase, or quantitative easing, since the Fed drove interest rates to near zero in late 2008.
“I believe the Fed, while feeling more confident in the economy bottoming, is not yet comfortable with ending QE and the US economic crutch it offers,” said Douglas Borthwick, managing director of Chapdelain Foreign Exchange in New York.
Bernanke noted that the main inflation gauge the Fed monitors rose just 1% in the 12 months through March, just half the central bank’s 2% target.
Part of the reason, he said, was a decline in energy prices. But there were also indications of more broad-based disinflation, Bernanke said.
Bernanke reiterated that the Fed was prepared to either increase or reduce the pace of its bond buys depending on economic conditions, as the central bank stated on May 1 after its last policy meeting.
US economic growth rose to a 2.5% annual rate in the first quarter following an anaemic end to 2012. Unemployment has fallen to 7.5% from a peak of 10%, but remains, as Bernanke put it, “well above its longer-run normal level.” Recent economic data have been mixed.
Bernanke said some headwinds face the US economy, such as Europe’s crisis, have been dissipating lately. But he added that a sharp tightening of the US government’s budget had become too big of a drag on growth for the central bank to fully offset.
He also warned that, while the Fed is aware of the potential problems that could result from a prolonged period of low interest rates, there are also risks to pulling back on stimulus too early.
“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said.
In separate remarks, New York Fed President William Dudley stressed that uncertain economic conditions meant it was too early to determine whether to taper the Fed’s bond purchases.