Fri, May 24, 2013 page15

• Bernanke says monetary stimulus to be continued

  PROS AND CONS: The Federal Reserve chairman said that despite the risks of monetary easing, pulling back on stimulus too soon could slow the US’ economic recovery

  • Reuters, WASHINGTON
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  The US 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 pedal, Fed Chairman Ben Bernanke said on Wednesday.

  A decision to scale back the US$85 billion in bonds the Fed is buying each month could come at one of the central bank’s “next few meetings” if the economy looked set to maintain momentum, Bernanke told US Congress.

  However, minutes from the Fed’s most recent meeting released on Wednesday showed the bar was still relatively high.

  “Many participants indicated that continued [job market] progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases,” according to minutes from the meeting held on April 30 and May 1.

  In testimony that showed little immediate desire to retreat from the Fed’s third and latest round of bond buying, Bernanke emphasized the high costs of both unemployment and inflation, which respectively continue to run above and below the Fed’s targets.

  “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 percent longer-run objective,” he said.

  The central bank is currently buying US$45 billion in US Treasury bonds and US$40 billion in mortgage-backed debt each month to keep borrowing costs low and encourage investment, hiring and economic growth.

  “I believe the Fed, while feeling more confident in the economy bottoming, is not yet comfortable with ending QE [quantitative easing] and the US economic crutch it offers,” said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York.

  Bernanke said that the main inflation gauge the Fed monitors rose just 1 percent in the 12 months through March, just half the central bank’s 2 percent target.

  He said the Fed was prepared either to increase or reduce the pace of its bond buys depending on economic conditions.

  “If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases,” he said.

  “If we do that it would not mean that we are automatically aiming toward a complete wind down. Rather, we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward,” he added.

  US economic growth rose to a 2.5 percent annual rate in the first quarter following an anemic end to last year.

  The unemployment rate has fallen to 7.5 percent from a peak of 10 percent, but remains, as Bernanke put it, “well above its longer-run normal level.”

  Bernanke said some headwinds facing the economy, including the debt crisis in Europe, have been dissipating.

  However, he said a sharp tightening of the US government’s budget had become too big of a drag on growth for the central bank to offset fully.

  Bernanke told the committee the Fed was aware of the risk that keeping monetary policy too easy for too long could fuel asset price bubbles.

  However, he said the central bank believed major asset prices were justified by the economy’s fundamentals.

  Further, he warned of the 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.

  He also suggested the Fed could refrain from selling off some of the mortgage-backed securities it has acquired when the time finally came to tighten monetary policy.

  “I personally believe that we could exit without selling any MBS,” he said.
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