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WASHINGTON. — Federal Reserve chairman Ben S. Bernanke said the Fed will probably hold down its target interest rate long after ending US$85 billion in monthly bond buying, and possibly after unemployment falls below 6,5 percent. “The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches the Fed’s 6,5 percent threshold, Bernanke said yesterday in a speech to economists in Washington. A “preponderance of data” will be needed to begin removing accommodation, he said.
In deciding when to wind down open-ended purchases of bonds, Fed officials are weighing both the “cumulative progress” since they began the programme in September 2012 as well as “the prospect for continued gains”, Bernanke said. The labour market has shown “meaningful improvement” since the start of the programme, although recent job reports have been “somewhat disappointing”, he said.
Policymakers are debating how to slow the pace of asset purchases without causing a surge in interest rates that could jeopardise the more than four-year economic expansion. Central bankers have sought to convince investors that tapering bond purchases wouldn’t signal that an increase in the benchmark interest rate is any closer.
In response to audience questions, Bernanke said markets are doing a better job “differentiating” between the Fed’s plans to hold interest rates low even after it begins to slow bond purchases.
When the Fed does slow asset purchases, “it will likely be because the economy has progressed sufficiently” for central bankers to rely more on guidance about the outlook for the main interest rate, Bernanke said in his speech.
“He’s saying that they achieved improvement in labour market conditions, but they’re still uncertain whether that progress will be sustained without all their support,” said Laura Rosner, a US economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York.
Bernanke said that the central bank’s policies are helping the American middle class by supporting housing, strengthening financial markets and shoring up consumers’ balance sheets.
“Our objectives are squarely tied to Main Street,” he said in response to questions at the dinner event for the National Economists Club. “The economy has been growing, jobs have been coming back and the Fed has been an important factor in maintaining that momentum.”
Bernanke’s testimony to Congress in May that the Fed “could take a step down” in its bond purchases helped push Treasury 10-year yields and 30-year mortgage rates to two-year highs and wiped out more than US$5 trillion in market capitalisation from global stocks.
The yield on the 10-year Treasury was 2,72 percent down from a two-year high of 3 percent in September. The average rate for a 30-year mortgage was 4,35 percent last week, declining from a two-year high in August, Freddie Mac data show.
The dollar held declines against major peers as Bernanke’s words echoed recent comments from other Fed officials including Janet Yellen, who has been nominated to succeed him.
The US currency slipped 0,1 percent to US$1,3552 per euro as of 2:17pm in Tokyo. The Bloomberg US Dollar Index, which monitors the greenback against 10 major peers, was little changed at 1,014.96 after touching 1,013.11 yesterday, the lowest since November 6.
Bernanke said in his remarks that interest rates rose too high over the summer, due in part to “a perceived reduction in the Fed’s commitment to meeting its objectives”. That increase “was neither welcome nor warranted”, he said.
The Federal Open Market Committee’s decision in September to refrain from slowing its bond buying surprised investors who had forecast the first tapering of the programme. The purchases have pumped up the Fed’s balance sheet to a record US$3,91 trillion.
Bernanke said that “although the FOMC’s decision came as a surprise to some market participants, it appears to have strengthened the credibility of the committee’s forward rate guidance”. He said the decline in interest rates since September is “more consistent” with that guidance.
The FOMC last month renewed its pledge to press on with bond purchases until the outlook for the labour market has “improved substantially.” The Fed probably won’t taper purchases until its March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey November 8. Unemployment last month was 7,3 percent.
Bernanke’s term as chairman ends on January 31, and vice chairman Yellen has been nominated to succeed him. Bernanke signalled that his views are similar to the ones she expressed in her confirmation hearing on November14 before the Senate Banking Committee I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery,” he said. — Bloomberg.
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