July 17, 2013

Bernanke: Timetable for bond purchases not preset

By Martin Crutsinger / The Associated Press

WASHINGTON — Chairman Ben Bernanke said Wednesday that the Federal Reserve's timetable for reducing its bond purchases is not on a "preset course" and the Fed could increase or decrease the amount based on how the economy performs.

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Chairman of the Federal Reserve Ben Bernanke testifies before the House Financial Services Committee on Capitol Hill on Wednesday.

AP

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Bernanke told lawmakers that the job market has made some progress since the Fed began buying $85 billion a month in bonds in September, as part of his mid-year economic report to Congress. And he repeated his belief that the Fed could slow that pace later this year if the economy strengthens.

But Bernanke cautioned that the Fed wants to see substantial progress in the job market before scaling back the bond purchases. If conditions worsen, the Fed could maintain its current pace or even increase it. The bond purchases are intended to keep long-term interest rates low and encourage more borrowing and spending.

He also noted that a number of other factors could influence the Fed's interest rate policies. U.S. economic growth could be restrained further by a weaker global economy or federal spending cuts and tax increases. Inflation could remain well below the Fed's 2 percent target. And the unemployment rate could drop because people are leaving the workforce — not because they are getting jobs.

"Because our asset purchases depend on economic and financial developments, they are by no means on a preset course," he told the House Financial Services Committee during the first of two days of testimony this week on the Fed's semi-annual report.

Stocks edged higher during Bernanke's testimony. And the yield on the benchmark 10-year Treasury note fell to 2.47 percent, down from 2.55 percent before Bernanke's comments were made public.

Paul Dales, senior U.S. economist for Capital Economics, said Bernanke's remarks did not alter his view that the Fed would likely start reducing its bond purchases in September and end them completely by the middle of next year. But Dales said that would be contingent on how the economy's health.

"We don't think this forward guidance could be much clearer," Dales said.

Bernanke's remarks were his latest attempt to calm markets, which have gyrated wildly since the Fed's June meeting.

The Dow Jones industrial average plunged 560 points after Bernanke first indicated at the post-meeting news conference on June 19 that the Fed could slow the bond purchases later this year. Since then, various Fed officials have tried to assure investors that any reduction would be based on stronger growth and improvement in the job market — not a target date. That helped restore investor confidence and the Dow and other market indicators have climbed to new highs.

On Wednesday, Bernanke said investors are starting to digest the Fed's guidance. He said it was important to provide a road map of the Fed's possible moves so that investors don't expect the bond purchases to continue indefinitely.

"I think the markets are beginning to understand our message," he said during the hearing.

The job market has improved since the Fed's bond buying began. Employers have created an average of 202,000 jobs a month this year, up from 180,000 in the previous six months.

Still, unemployment remains elevated at 7.6 percent. And economic growth has been modest the past three quarters.

In his testimony, Bernanke again said "a highly accommodative monetary policy will remain appropriate for the foreseeable future" because unemployment remains high and inflation is below the Fed's target of 2 percent.

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