Bernanke Signals Further Easing Unlikely

Bernanke Signals Further Easing Unlikely
Ben S. Bernanke, chairman of the Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington on April 25, 2012. Photographer: Andrew Harrer/Bloomberg

Chairman Ben S. Bernanke is signaling that further Federal Reserve stimulus is unlikely unless the economy unexpectedly deteriorates.

The labor and housing markets have shown signs of improvement, and growth will “pick up gradually” after remaining “moderate,” the Federal Open Market Committee said yesterday in Washington, repeating a plan to keep borrowing costs low until at least late 2014. Fed officials also upgraded their projections for economic growth, inflation and the unemployment rate for this year.

With inflation close to the Fed’s goal of 2 percent, it would be “reckless” to pursue policies that would drive up prices faster while offering “perhaps doubtful gains” to the economy, Bernanke said at a press conference. Still, central bankers “remain prepared to do more” if conditions worsen, he said. Stocks extended gains and Treasuries pared losses after Bernanke’s remarks kept stimulus speculation alive.

“This is as close as they get to being on hold for a long time,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “They’re in no hurry to raise rates or to signal that, but what we’re seeing is more conviction in the view that growth will hold up relatively well.”

The jobless rate isn’t declining as quickly as desired, and the economy is still vulnerable to potential shocks from the sovereign debt crisis in Europe, the FOMC said in a statement after a two-day meeting. Fiscal tightening may also weigh on growth, Bernanke said.

Growth Estimates

While the FOMC said growth is likely to “remain moderate over coming quarters,” Fed officials increased their estimates for 2012. The economy will expand at a 2.4 percent to 2.9 percent pace this year, up from a January projection of 2.2 percent to 2.7 percent, central bankers said.

At the same time, Fed officials lowered their growth estimates for next year and 2014. Bernanke said the lower expectations may reflect the impact from fiscal tightening, and he urged Congress to reduce budget deficits without endangering the expansion. Bush-era income tax cuts will expire at the end of the year, and automatic spending cuts will be poised to take effect in January.

“The economy would need to nearly stall for there to be more” bond buying, said Jay Bryson, a senior global economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “It would need to be significantly stronger for them to change the guidance from late 2014. So, we are firmly on hold.”

Stocks rose for a second day yesterday after Bernanke’s comments and as earnings beat estimates at companies from Apple Inc. to Boeing Co. The Standard & Poor’s 500 Index climbed 1.4 percent to 1,390.69. The yield on the benchmark 10-year Treasury note rose 0.01 percentage point to 1.98 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices, after rising as high as 2.04 percent.

Operation Twist

The Fed didn’t alter its plan to swap $400 billion of short-term debt in its portfolio with long-term debt to lengthen the average maturity of its holdings, dubbed Operation Twist. Bernanke said the program’s scheduled completion in June won’t amount to a tightening of policy.

The Fed’s balance sheet has swelled to a record of almost $3 trillion after two rounds of bond purchases, or so-called quantitative easing, totaling $2.3 trillion. The purchases were intended to spur the economy by pushing down long-term borrowing costs on everything from car loans to mortgages.

When the Fed embarked on its second round of asset purchases in November 2010, the U.S. faced “at least a modest risk” of deflation, which isn’t currently a threat, Bernanke said. He rejected suggestions that the Fed should allow inflation to rise above its 2 percent goal in order to stimulate growth, saying such a move would undercut the Fed’s credibility.

‘Doubtful Gains’

“To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be unwise to do,” Bernanke said. It would be “very reckless” to “actively seek a higher inflation rate in order to achieve a slightly” faster reduction in unemployment.

Paul Krugman, a Princeton University economist and Nobel laureate, said in an April 24 New York Times Magazine article that the Fed should raise its 2 percent inflation target to reduce unemployment.

Krugman said Bernanke isn’t following his own advice to the Bank of Japan more than a decade ago on how to avert economic stagnation. Bernanke also disputed that argument, saying the U.S. isn’t currently in deflation, unlike Japan 15 years ago.

“Looking at the current situation in the United States, we are not in deflation,” he said. “When deflation became a significant risk in late 2010, or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target.”

‘Temporary Bulge’

He said a rise in gasoline prices “has created a temporary bulge” in inflation that’s likely to “pass through the system.”

Fed officials also raised their projections for the inflation rate this year, as measured by the personal consumption expenditures index, to 1.9 percent to 2 percent, from 1.4 percent to 1.8 percent.

Bernanke “made it clear he is not willing to toy with the inflation target to try to achieve a little more growth and employment,” said Paul Edelstein, director of financial economics at IHS Inc. in Lexington, Massachusetts. “The message seems to be they are clearly moving away from quantitative easing.”

Richmond Fed President Jeffrey Lacker dissented for the third meeting in a row. Lacker has said he believes the first increase in interest rates will likely be necessary in 2013.

Labor Market View

Fed officials also upgraded their view of the labor market, estimating that the unemployment rate will fall to 7.8 percent to 8 percent by year-end, compared with a January forecast of 8.2 percent to 8.5 percent. That’s still well above their estimate of a longer-run jobless rate of 5.2 percent to 6 percent. The unemployment rate was 8.2 percent in March.

The forecasts reflect the so-called central tendency, which excludes the three highest and three lowest projections of 17 policy makers.

An April 27 government report may show that gross domestic product rose at a 2.5 percent annual rate, according to the median forecast in a Bloomberg News survey of economists, driven by the biggest increase in household demand in a year.

“Despite its struggle with the sustained period of relative high unemployment, we’re pleased to see some early signs of a slowly improving macroeconomic environment” in the U.S., Muhtar Kent, president and chief executive of Coca-Cola Co., the world’s largest soft-drink maker, said in an April 17 earnings call.

Borrowing Costs

The Fed also released a chart showing that seven of 17 Fed officials expect borrowing costs to remain below 1 percent at the end of 2014, compared with nine in January, while 10 expected rates to be 1 percent or higher, versus eight in January.

Only 10 of the 17 officials are voting members of the rate-setting FOMC, and Fed doesn’t identify the individuals making the forecasts. Bernanke said the central bank is considering revealing who made each forecast as it reviews ways to improve its communications.

Bernanke is “still clearly concerned about the outlook, but at this point, he doesn’t think the economy needs additional accommodation,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. in New York. “He remains cautious.”

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