Fed's Bernanke: Premature Tightening Would Endanger Recovery

Wednesday, 22 May 2013 10:11 AM

 

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The U.S. job market remains weak and that it is too soon for the Federal Reserve to end its extraordinary stimulus programs,  Fed Chairman Ben Bernanke told Congress.

"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 in testimony to the Joint Economic Committee.

Bernanke noted that the economy is growing moderately this year and unemployment has fallen to a four-year low of 7.5 percent. Still, unemployment remains well above levels consistent with healthy economies. And Bernanke said higher taxes and deep federal spending cuts are expected to slow economic growth this year.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

His comments about the many risks facing the economy, along with the benefits gained so far from the Fed's stimulus, suggest the Fed is not ready to taper bond purchases that have helped lower long-term interest rates to encourage more borrowing and spending.

Stocks initially surged after Bernanke's comments. But they gave up some gains shortly after Bernanke wouldn't rule out scaling back the bond purchases by the fall.

The Fed has said it plans to continue its $85 billion-a-month in Treasury and mortgage bond purchases until the job market improves substantially. And after its April 30-May 1 meeting, the Fed said it could increase or decrease the pace depending on how the job market and inflation fare.

The panel's chairman, Rep. Kevin Brady, R-Texas, criticized the Fed's aggressive policies and pressed Bernanke to explain when the Fed might begin to reduce its bond purchases.

Bernanke said the Fed could take a "step down" if the job market shows "real and sustainable progress" over the next few meetings. When Brady asked if that could happen before Labor Day, Bernanke said, "I don't know, it will depend on the data."

But Bernanke made clear that the Fed could reverse course and increase its purchases if the economy began to falter. "We could raise or lower our purchases going forward," Bernanke said.

In recent months, the job market and the broader economy have shown renewed vigor. The economy has added an average of 208,000 jobs a month since November. That's up from only 138,000 a month in the previous six months.

The economy has benefited from a resurgent housing market, rising consumer confidence and the Fed's stimulus actions, which have helped ignite a stock market rally. The Standard & Poor's 500 stock index has jumped 17 percent this year to a record high. Higher stock prices tend to make many people feel wealthier and more inclined to spend.

Those gains, in part, are why critics of the bond purchases, including some Fed regional bank presidents, have questioned the need to continue them at their current pace. They argue that keeping interest rates too low for too long could send inflation surging or inflate dangerous bubbles in assets such as stocks or real estate. Such a bubble could burst with the same destabilizing effects that the housing bust caused.

Bernanke has had solid support for the bond purchases among the voting members of the Fed's interest-rate setting committee. At each of the Fed's three policy meetings this year, the committee has approved the purchases 11-1.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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