Federal Reserve Chairman Ben S. Bernanke said further gains in the U.S. labor market are needed for the central bank to consider reducing its record monetary easing.
“Obviously, there has been improvement,” he said at a news conference in Washington today after the Fed decided to leave the pace of asset purchases unchanged at $85 billion a month. “One thing we would need is to make sure that this is not a temporary improvement.”
The Fed, seeking to boost the pace of growth and heal a job market still scarred by the deepest recession since the Great Depression, also said today it will leave its key interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.
Stocks extended gains and Treasury yields remained higher. The Standard & Poor’s 500 Index rose 0.7 percent to 1,558.71 as of 4 p.m. in New York, and the yield on the 10-year Treasury note climbed to 1.96 percent as of 5 p.m., from 1.9 percent late yesterday.
When the central bank began its third round of large-scale asset purchases in September, the most recent Labor Department report showed the unemployment rate was 8.1 percent. Joblessness fell to 7.7 percent in February, and monthly payroll growth has averaged almost 200,000 since October.
Even so, the labor market is far from making up the losses it sustained during the 18-month recession that ended in June 2009. The economy lost 8.8 million jobs as a result of the recession, and it has since regained 5.7 million.
Bernanke and Fed Vice Chairman Janet Yellen need to see stronger labor-market data before they’ll support winding down the asset-purchase program, said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York.
“At the end it’s going to come down to Bernanke and Yellen convinced the economy has improved enough, and I’m not sure we’re going to get to that quickly,” Hanson said.
Bernanke, in the press conference, said the pace of asset purchases may be altered if the economy continues to heal.
“As we make progress toward our objective, we may adjust the flow rate of purchases from month to month to appropriately calibrate the amount of accommodation,” Bernanke, a former Princeton University professor, said. “We think it makes more sense to have our policy variable, which is the rate of flow of purchases respond in a more continuous or sensitive way to changes in the outlook.”
The Fed’s monthly purchases will remain divided between $40 billion of mortgage-backed securities and $45 billion of Treasury securities, the Federal Open Market Committee said in a statement. The purchases are aimed at spurring the economy by lowering interest rates on everything from mortgages to car loans.
Echoing earlier language, the FOMC said the purchases will continue until “the outlook for the labor market has improved substantially in a context of price stability” and that it will continue to reinvest maturing securities.
“Overall, still-high unemployment in combination with relatively low inflation underscores the need for policies that will support progress toward maximum employment in the context of price stability,” Bernanke, 59, said.
Kansas City Fed President Esther George dissented for the second meeting in a row, saying she was “concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”
George has said holding interest rates near zero for too long risks creating financial bubbles. She said in January that prices of assets “such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels” and may signal market imbalances.
Since the Fed last met in January, stocks have climbed to new highs, with the Dow Jones Industrial Average exceeding its prior peak from October 2007. The index, which has gained almost 11 percent this year, is near its record close of 14,539.14 on March 14. The yield on the benchmark 10-year Treasury reached an 11-month high of 2.06 percent on March 11.
Bernanke said that the Fed doesn’t “see anything that’s out of line with historical patterns” in the stock market. “There has been increased optimism about the economy” and the share of income going to profits has risen, so higher stock prices aren’t surprising, he said.
Spoke to Obama
Bernanke said that he has spoken with President Barack Obama about what he will do when his second four-year term as chairman ends in January of 2014. Obama reappointed Bernanke as chairman in 2010 and hasn’t said if he intends to reappoint Bernanke again.
“I have spoken to the president a bit but I really don’t have any information for you at this juncture,” Bernanke said. “I don’t think I’m the only person in the world who can manage the exit” from the central bank’s record stimulus.
Policy makers lowered their expectations for the unemployment rate at the end of the year to a range of 7.3 percent to 7.5 percent from a previous forecast of 7.4 percent to 7.7 percent. The economy will expand 2.3 percent to 2.8 percent this year, they estimate, compared with their earlier forecast of 2.3 percent to 3 percent growth.
Thirteen of the 19 FOMC participants estimated that the first increase in the federal funds rate from its current range of zero to 0.25 percent will occur in 2015, the same as at the December meeting.
Central bankers last provided their forecasts in December. The Fed today released the policy makers’ quarterly economic forecasts at the same time as the statement. Previously, on days Bernanke held a press conference, the central bank released the statement at about 12:30 p.m. and the FOMC forecasts an hour and a half later. From now on, both will be released at 2 p.m.
Forty-four of 45 economists in a Bloomberg survey March 13-18 said the pace of purchases wouldn’t be reduced at today’s meeting. Fifty-eight percent of economists in the survey said officials won’t reduce buying until the fourth quarter or later, while 55 percent said they expect the Fed to end its quantitative easing entirely in the first half of next year.