Federal Reserve Chairman Ben S. Bernanke said the Fed will probably hold down its target interest rate long after ending $85 billion in monthly bond buying, and possibly after unemployment falls below 6.5%.
The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the jobless rate breaches the Feds 6.5% threshold, Bernanke said yesterday in a speech to economists in Washington. A preponderance of data will be needed to begin removing accommodation, he said.
In deciding when to wind down open-ended purchases of bonds, Fed officials are weighing both the cumulative progress since they began the program in September 2012 as well as the prospect for continued gains, Bernanke said. The labor market has shown meaningful improvement since the start of the program.
Policy makers are debating how to slow the pace of asset purchases without causing a surge in interest rates that could jeopardize the more than four-year economic expansion. Central bankers have sought to convince investors that tapering bond purchases wouldnt signal that an increase in the benchmark interest rate is any closer.
In response to audience questions, Bernanke said markets are doing a better job differentiating between the Feds plans to hold interest rates low even after it begins to slow bond purchases.
'PROGRESSED SUFFICIENTLY
When the Fed does slow asset purchases, it will likely be because the economy has progressed sufficiently for central bankers to rely more on guidance about the outlook for the main interest rate, Bernanke said in his speech.
Hes saying that they achieved improvement in labor market conditions, but theyre still uncertain whether that progress will be sustained without all their support, said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York.
Bernanke said that the central banks policies are helping the American middle class by supporting housing, strengthening financial markets and shoring up consumers balance sheets.
Our objectives are squarely tied to Main Street, he said in response to questions at the dinner event for the National Economists Club. The economy has been growing, jobs have been coming back and the Fed has been an important factor in maintaining that momentum.
WIPED OUT
Bernankes testimony to Congress in May that the Fed could take a step down in its bond purchases helped push Treasury 10-year yields and 30-year mortgage rates to two-year highs and wiped out more than $5 trillion in market capitalization from global stocks.
The yield on the 10-year Treasury was 2.73% at 9:04 a.m. in New York today, down from a two-year high of 3% in September. The average rate for a 30-year mortgage was 4.35% last week, declining from a two-year high in August, Freddie Mac data show.
U.S. stock-index futures rose after a report today showed retail sales climbed more than forecast in October and investors awaited the release of minutes of the Federal Reserves latest policy meeting. Futures on the Standard & Poors 500 Index expiring in December rose 0.2% to 1,789.00 at 9:01 a.m. in New York.
MARKET SURPRISE
Bernanke said in his remarks that interest rates rose too high over the summer, due in part to a perceived reduction in the Feds commitment to meeting its objectives. That increase was neither welcome nor warranted, he said.
The Federal Open Market Committees decision in September to refrain from slowing its bond buying surprised investors who had forecast the first tapering of the program. The purchases have pumped up the Feds balance sheet to a record $3.91 trillion.
Bernanke said that although the FOMCs decision came as a surprise to some market participants, it appears to have strengthened the credibility of the committees forward rate guidance. He said the decline in interest rates since September is more consistent with that guidance.
The FOMC last month renewed its pledge to press on with bond purchases until the outlook for the labor market has improved substantially. The Fed probably wont taper purchases until its March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8. Unemployment last month was 7.3%.
YELLEN NOMINATION
Bernankes term as chairman ends on Jan. 31, and Vice Chairman Janet Yellen has been nominated to succeed him. Bernanke signaled that his views are similar to the ones she expressed in her confirmation hearing on Nov. 14 before the Senate Banking Committee.
I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery, he said.
Yellen told lawmakers last week that job-market gains would arise from stronger economic growth, which was running at a 2.8% rate last quarter. Fed officials forecast a 2% to 2.3% expansion for 2013, compared with a 1.7% estimate released yesterday by the Organization for Economic Cooperation and Development.
