Bernanke’s semi-annual testimony capped a whirlwind two months in which stocks and bonds initially sank on his suggestion that the Fed’s extraordinary bond-buying initiative likely would be pared back later this year and ended in mid-2014 if the job market continues to improve. Markets have rallied recently as Bernanke and other Fed policymakers have stressed that the Fed plans to keep its benchmark short-term interest rate near zero for “a considerable time” after the bond-buying ends.
“I think markets are beginning to understand our message,” Bernanke told the House Financial Services Committee. “We need accommodative monetary policy for the foreseeable future.”
The Fed is buying $85 billion a month in Treasury bonds and mortgage-backed securities to hold down long-term interest rates and spur economic activity. Many economists expect the Fed to reduce the purchases to about $70 billion as early as September. But that prospect has caused interest rates to rise recently. And if economic growth weakens as a result, the current pace of bond buying “could be maintained for longer,” Bernanke said. “They are by no means on a preset course.”
He noted that annual inflation is below the Fed’s 2 percent target, a trend that, if it persists, also could prompt the Fed to keep its bond-buying at full throttle. Very low inflation could lead to falling prices and recession.
The Fed has said it plans to keep its short-term rate near zero at least until the 7.6 percent unemployment rate declines to 6.5 percent, likely in 2015, as long as inflation is stable. But Bernanke said Wednesday it could maintain the historically low rate longer, if, for example, the drop in unemployment is due to fewer people working or looking for work.
He bristled at criticism from Rep. Bill Huizenga, R-Mich., that Fed policies are helping Wall Street at the expense of Main Street Americans struggling with lower interest rates in their savings accounts.
“We’re very focused on Main Street,” Bernanke replied. “We’re trying to create jobs, and we’re trying to make housing affordable.”
He also reiterated a warning to Congress that $85 billion in budget cuts are expected to shave economic growth in 2013 by 1.5 percentage points and result in 750,000 fewer jobs. “It’s making a very big difference,” he said. “It’s very substantial.”
Bernanke urged Congress to temper the cuts while the economy is wobbly. “Fiscal policy is focusing a bit too much on the short run and not enough” on a long-term plan.
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