Bernanke Affirms Low-Rate Pledge Without Offering Easing Options

Ben S. Bernanke, Chairman of the U.S. Federal Reserve,
Ben S. Bernanke, chairman of the U.S. Federal Reserve, listens during a House Financial Serves Committee hearing in Washington, D.C. on Feb. 29, 2012. Photographer: Andrew Harrer/Bloomber

Federal Reserve Chairman Ben S. Bernanke affirmed that interest rates are likely to stay low at least through late 2014 without offering any indication that further monetary easing is under consideration.

“At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives” for stable prices and maximum employment, Bernanke said today in testimony to the House Financial Services Committee in Washington.

While describing “positive developments” in the labor market, Bernanke said it “remains far from normal.” In the first day of his semiannual monetary policy report to Congress, he said a recent rise in gasoline prices “is likely to push up inflation temporarily” and reduce consumer purchasing power.

Stocks erased gains as the comments damped speculation of more easing. When he last appeared before Congress in July, Bernanke outlined steps that the Federal Open Market Committee subsequently took in its August and September meetings. Today, he made no mention of additional options to boost growth in prepared testimony or answers to lawmakers’ questions.

“Monetary policy is not a panacea,” he said in response to a question. “It can help offset cyclical fluctuations and financial crises like we’ve had, but the long-term health of the economy depends mostly on decisions taken by the Congress and the administration.”

Signs of Strength

At the same time, Bernanke indicated that recent signs of strength in the world’s largest economy haven’t changed his view that low rates are needed to keep the two-year expansion going and further reduce the unemployment rate, which dropped to a three-year low of 8.3 percent in January.

A government report today showed that the economy expanded at a 3 percent pace in the fourth quarter, up from an initial estimate of 2.8 percent. Since then, indicators of consumer confidence, home sales and manufacturing have climbed.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose to a 10-month high of 64 from 60.2 in January. Readings above 50 signal expansion and the figure exceeded all forecasts in a Bloomberg News survey.

The Fed’s Beige Book regional business survey, released today after Bernanke’s testimony, said the economy expanded at a “modest to moderate pace” in January and early February, fueled by manufacturers, including automakers. The survey is published two weeks before the Federal Open Market Committee meets to set monetary policy.

Stocks, Treasuries

The Standard & Poor’s 500 Index fell 0.1 percent to 1,370.49 at 2:48 p.m. New York time after rising as much as 0.4 percent. The yield on the 10-year Treasury note rose to 1.99 percent from 1.94 percent late yesterday.

Bernanke sounded a note of optimism on Europe, saying that if its financial system remains stable, a mild slump would probably not threaten the U.S.

“We do think that if Europe has a mild downturn, which is what they are currently forecasting, and if the financial situation remains under control that the effect on the U.S. might not be terribly serious,” Bernanke said.

U.S. banks “have done a pretty good job” hedging exposure to sovereign debt and to European banks, he said. Still, there is “significant risk” of stress and contagion from “a major financial accident,” he said in response to questions.

‘Subdued’ Inflation

The outlook for inflation is likely to “remain subdued,” he said, as the Fed continues to monitor energy markets. Gasoline prices have climbed 13 percent since the start of the year to $3.72 a gallon, according to the American Automobile Association.

“Participants expected the subdued level of inflation to persist beyond this year,” the 58-year-old Fed chief said, describing the assessment of the Federal Open Market Committee at its January meeting. “Since these projections were made, gasoline prices have moved up, primarily reflecting higher global oil prices -- a development that is likely to push up inflation temporarily while reducing consumers’ purchasing power.”

In January, Fed officials were keeping open the option of a third round of bond purchases in case the economy weakens or inflation falls too low.

“A few” members of the FOMC said economic conditions could warrant buying assets “before long,” and others indicated that action would become necessary if the “economy lost momentum” or inflation was too low, according to minutes of the meeting.

More Transparency

Bernanke said the FOMC’s announcement of a 2 percent inflation target last month was aimed at providing “additional transparency” and did “not imply a change in how the committee conducts policy.”

The Fed chairman said at times when the inflation and full employment goals are not complementary, the FOMC “follows a balanced approach in promoting them.”

He also shed light on the committee’s operational strategy at such times. He said the balanced approach will take into account “the magnitudes of the deviations of inflation and employment from levels judged to be consistent with the dual mandate, as well as the potentially different time horizons over which employment and inflation are projected to return to such levels.”

The FOMC’s forecasts from January suggest policy makers see a higher deviation in unemployment than inflation. Those forecasts showed the panel expects the personal consumption expenditures price index to be in a range of 1.4 to 2 percent over the next three years, according to central tendency estimates for 2012 to 2014. That is at or below the committee’s long-run goal of 2 percent inflation.

Unemployment Forecasts

By contrast, it forecasts the unemployment rate to be in a range 6.7 percent to 7.6 percent in 2014, or as much as 1.6 percentage points above a longer-run estimate of full employment of 6 percent. That indicates that policy makers see a higher deviation in employment from their mandate and a longer period for it to return to the goal compared with inflation.

The central bank has kept interest rates close to zero since December 2008 and expanded its balance sheet by buying $2.3 trillion of assets in two rounds of bond purchases.

Signs of economic strength have help send stocks higher. The S&P 500 index has rallied almost 25 percent since reaching the lowest level of 2011 on Oct. 3.

Confidence among U.S. consumers climbed to a 12-month high in February, the New York-based Conference Board said yesterday. The report reinforced other consumer sentiment measures such as the Bloomberg Consumer Comfort Index which climbed to the highest level in 2012 as of Feb. 19.

“We’ve been encouraged by recent improvements in some key economic measures and we’re pleased with the pace of our sales since the holiday season,” Gregg Steinhafel, the chairman and chief executive of Minneapolis-based Target Corp., said in a Feb. 23 earnings call. “Yet, we expect we’ll continue to see mixed signals in the economy going forward.”

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