Fed Chairman Reaffirms Economic Plan
By BINYAMIN APPELBAUM
Published: July 17, 2013
WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, sharpened
his insistence Wednesday that the Fed remains committed to its economic
stimulus campaign and that it did not intend to signal it was lowering
its sights in recent weeks.
Bernanke Faces House Panel
Ben S. Bernanke, the Fed chairman, is testifying before the House
Financial Services Committee. Binyamin Appelbaum is following the
hearing on Twitter.
James Lawler Duggan/Reuters
Mr. Bernanke said that the Fed expected the economy to gain strength in
the coming months, potentially allowing the Fed to decelerate its
stimulus campaign not because it has changed its goals but because it
has begun to achieve them.
But he warned that Congress itself remains the greatest obstacle to
faster growth. Federal spending cuts are reducing growth this year by
about 1.5 percentage points, he said. While the Fed expects the impact
to diminish next year, he said there was a risk Congress would create
new problems for the economy.
“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,” Mr. Bernanke said during a biannual appearance
before the House Financial Services Committee.
Wednesday may have marked the last time that Mr. Bernanke will appear
before the committee to report on the Fed’s conduct of monetary policy.
He will conclude his second term as chairman at the end of January and
is widely expected to step down. Members of both parties took the
opportunity to praise him, although Republicans generally added that
they opposed the Fed’s recent efforts.
“You acted boldly and decisively and creatively – very creatively, I
might add,” said the committee’s chairman, Texas Republican Jeb
Hensarling.
“You have never been boring,” said New York Democrat Carolyn Maloney.
Mr. Bernanke then did his very best to be boring, sending the message to
markets that had been roiled by his comments last month that it was
much ado about nothing.
The shabby condition of the economy has become the constant background
for Mr. Bernanke’s public appearances. Unemployment remains stubbornly
common, inflation has sagged to the lowest pace on record and growth is
tepid.
Mr. Bernanke’s message Wednesday was that the Fed will begin to
decelerate only if those problems continue to diminish. If unemployment
stays high, the Fed will keep buying bonds. If inflation stays low, the
Fed will keep buying bonds. If growth weakens, the Fed will keep buying
bonds. Indeed, he revived a talking point from earlier this year in
insisting that the Fed was willing to increase the volume of its monthly
purchases if it decided that more stimulus was necessary.
“Because our asset purchases depend on economic and financial
developments, they are by no means on a preset course,” Mr. Bernanke
told the committee.
Mr. Bernanke has adopted a stronger tone in particular on the subject of
inflation. Fed officials insisted for much of the year that they were
not concerned about the sagging pace of inflation, which has fallen to
the lowest pace on record. Prices increased by just 1 percent during the
12 months that ended in May, well below the 2 percent pace that the Fed
considers most healthy. In recent weeks, the Fed has shifted its tone,
emphasizing that it wants prices to rise more quickly.
On Wednesday Mr. Bernanke put inflation alongside unemployment as the
reasons for the Fed’s commitment to its stimulus campaign: “Our
intention is to keep monetary policy highly accommodative for the
foreseeable future,” he said, “because inflation is below our target and
unemployment is quite high.”
The central bank says it plans to hold short-term interest rates near
zero at least as long as the unemployment rate remains above 6.5
percent. It also is expanding its holdings of mortgage-backed and
Treasury securities by $85 billion a month in an effort to accelerate
the pace of employment growth.
Mr. Bernanke repeated his comments earlier this month that the Fed is
considering “changing the mix of tools” by reducing the pace of asset
purchases later this year, but at the same time suggesting it will
extend the duration of near-zero rates. He said that this plan enjoyed
“good support” from other Fed officials.
Bernanke Faces House Panel
Ben S. Bernanke, the Fed chairman, is testifying before the House
Financial Services Committee. Binyamin Appelbaum is following the
hearing on Twitter.
He also emphasized that such a cut was not a foregone conclusion.
“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,” Mr. Bernanke said in his prepared remarks.
His likely departure, however, means that his credibility increasingly
depends on convincing investors that the rest of the Fed’s policy-making
committee shares his views and is committed to maintaining the same
policies even if he departs.
That task has been complicated by the fragmentation of the committee’s
views about asset purchases. About half of the 19 officials who
participate in meetings of the Fed’s policy-making committee indicated before the committee’s most recent meeting
last month that they expected an end to asset purchases later this
year, while the rest – including Mr. Bernanke – see a need for purchases
into 2014.
The announcement last month that the Fed expects to reduce its asset
purchases later this year drove up interest rates on mortgages and other
loans. Some investors concluded that the Fed was curtailing its
ambitions for the recovery, while others saw evidence that the Fed was
overly optimistic in its forecasts.
Mr. Bernanke described that response as “unwelcome,” but he added that
it had likely reduced some “excessively risky or leveraged positions” –
easing concerns among some Fed officials that its efforts were seeding
new bubbles.
He downplayed concerns that the recent rate increases had undermined
economic activity. “Housing activity and prices seem likely to continue
to recover, notwithstanding the recent increases in mortgage rates,” he
said.
COPY http://www.nytimes.com/
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