Bernanke Signals No Rush to Tighten When Asset-Buying Ends

Federal Reserve Chairman Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.

A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy. A “sustained period of stronger job creation” is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an “extended period,” he said.

The comments suggest Bernanke will keep the Fed on course to complete $600 billion of Treasury purchases through June under the second round of so-called quantitative easing. He pledged to act if higher commodity prices persist, spurring inflation and increasing inflation expectations.

“Things will not change materially with regards to monetary policy in 2011 and perhaps heading out into 2012,” said Brian Levitt, New York-based economist at OppenheimerFunds Inc., which manages $182 billion. “They will complete Quantitative Easing 2, and the fed funds rate will remain effectively at zero for the rest of the year.”

Bernanke said yesterday that stable labor costs and the impact of commodity-price gains in recent decades indicate that the U.S. should expect a “temporary and relatively modest increase” in consumer prices.

“If you look at the history of commodity prices, they tend to be significantly more volatile than other prices,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York, in an interview on Bloomberg Television’s “Street Smart.” Bernanke will probably “sit back for a while and make sure that it doesn’t spread to the general price level.”

Middle East Turmoil

Crude oil rose 2.7 percent yesterday in New York to the highest level since September 2008 as Middle East turmoil threatened to spread from Libya to top OPEC producers Saudi Arabia and Iran.

Hours after Bernanke testified, the San Francisco Fed yesterday named John C. Williams, research director for the regional bank, as its new president to succeed Janet Yellen, who became the Fed board’s vice chairman in October.

Williams, 48, has worked in the Fed system since 1994 and served as executive vice president and research director since 2009. He will vote in policy making decisions every three years, starting next year.

‘Big Impact’

Bernanke said under questioning from senators yesterday that he doesn’t believe the end of asset purchases will have a “big impact” on market interest rates. Borrowing costs are affected more by the stock of central bank holdings rather than the flow of purchases, he said.

Bernanke didn’t indicate what actions the Fed will likely take after completing the bond buying, which followed a $1.7 trillion first round of purchases of mortgage-backed debt and Treasuries. He is scheduled for a second day of monetary policy testimony beginning at 10 a.m. today before the House Financial Services Committee in Washington.

Treasuries rose yesterday, pushing the yield on the 10-year note down to 3.39 percent in New York from 3.43 percent on Feb. 28. The Standard & Poor’s 500 Index fell 1.6 percent to 1,306.33.

Since August, when Bernanke signaled the Fed might buy securities to stimulate the economy, “downside risks to the recovery have receded, and the risk of deflation has become negligible,” he said yesterday.

Fourth-Quarter Growth

Last week, the Commerce Department reduced its estimate of fourth-quarter growth to a 2.8 percent annual pace. Consumer purchases rose at a 4.1 percent pace, the most since the same three months in 2006, compared with a 4.4 percent rate originally estimated.

Inflation is likely to remain low through 2013, Bernanke said.

“Sustained oil price increases will pass through to core inflation,” said Christopher Low, chief economist at FTN Financial, New York. “You don’t take a revolution that is in half a dozen countries and is now spreading and tamp it down in three days.”

Bernanke, 57, a former Princeton University economist, said that “we will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability.”

At the same time, the labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” he said. “The housing sector remains exceptionally weak,” and “slow wage growth” is keeping labor costs in check, he said.

Manufacturing Accelerates

A separate report yesterday showed U.S. manufacturing accelerated in February to the fastest pace since May 2004. The Tempe, Arizona-based Institute for Supply Management’s factory index increased to 61.4 from 60.8 a month earlier. Readings greater than 50 signal growth.

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

Increases in commodity prices in recent months mainly reflect “rising global demand for raw materials, particularly in some fast-growing emerging market economies, coupled with constraints on global supply in some cases,” Bernanke said. He also said that commodity prices “have risen significantly in terms of all major currencies,” rejecting the idea that the Fed’s easy monetary policy is responsible.

Higher gasoline prices, “while obviously a problem for a lot of people,” don’t pose a major risk yet to the recovery or inflation, Bernanke said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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