US Federal Reserve Chairman Ben Bernanke said on Wednesday that the US economy still needs help from the Fed’s low interest rate policies.
Bernanke told the National Bureau of Economic Research that because unemployment remains high and inflation is below the Fed’s target, the policies are still necessary. He also said the economy is also being held back by higher taxes and federal spending cuts.
“If you put all of that together, you can only conclude that highly accommodative monetary policy for the foreseeable future is what is needed for the US economy,” Bernanke said.
Bernanke’s comments were his latest effort to stress that the Fed will continue to stimulate the economy, even after it begins to slow its bond purchases. The Fed plans to keep its investment holdings constant to avoid causing long-term rates to rise too quickly. It also plans to keep short-term rates at record lows at least until unemployment slides to 6.5 percent.
And Bernanke has said 6.5 percent unemployment is a threshold, not a trigger: The Fed might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.
Unemployment is now 7.6 percent.
Stock index futures rose as Bernanke spoke. The Standard & Poor’s index futures were up 8 points, or 0.5 percent, at 1,656 as of 5:40pm — shortly after Bernanke wrapped up his remarks.
In Asian markets, stocks rallied yesterday after Bernanke said its stimulus drive would be kept in place “for the foreseeable future,” while currency dealers immediately sold the US dollar, betting that interest rates would remain low for a long time to come. In New York, the greenback ended at ￥99.59, well off the ￥101.10 in Tokyo earlier in the day.
By yesterday afternoon the greenback was trading at ￥98.87n. The euro bought US$1.3071 and ￥129.20 against US$1.3013 and ￥129.59.
On Wednesday, Bernanke did not signal any changes in the Fed’s bond-buying program, which have kept long-term interest rates low and encouraged more borrowing and spending. However, he defended recent comments he made after the Fed’s meeting last month.
At his June 19 news conference, Bernanke said the Fed would likely slow its bond purchases later this year and end them around mid-next year if the economy continued to strengthen. The Fed has been buying US$85 billion in Treasury and mortgage bonds each month since late last year.
Stocks and bonds plunged in the days after his remarks. Some critics said the Fed bungled its communications strategy.
Bernanke asked his audience to consider what might have happened if the Fed had given no signals on when the bond buying might be curtailed. He said that might have led to an increase in risk-taking on the part of investors “reflecting an expectation for an infinite” program of bond purchases.
“Explaining what we are doing may have avoided a much more difficult situation at another time,” he said.
Bernanke also did not provide any clues on his own future. Many expect he will leave when his term ends in January.
When asked about his legacy, he said others would certainly judge his handling of the 2008 financial crisis. He also said the Fed, under his leadership, has made significant strides in providing the public with more information on how the central bank operates.