Bernanke Says Monetary Stance Meets Fed Goals
Federal Reserve Chairman Ben S. Bernanke said that keeping monetary stimulus is warranted even as the unemployment rate falls and rising oil prices may cause inflation to rise temporarily.
“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” of the Fed for stable prices and maximum employment, Bernanke said today in prepared testimony to the House Financial Services Committee in Washington.
While describing “positive developments” in the labor market, Bernanke said “the job market remains far from normal” during the first day of his semi-annual monetary policy report to Congress. He said a recent rise in gasoline prices “is likely to push up inflation temporarily while reducing consumers’ purchasing power.”
The testimony indicates that recent signs of strength in the world’s largest economy won’t change the Fed’s view that “exceptionally low” interest rates are likely to be warranted at least through late 2014. At the same time, Bernanke gave no signal that additional policy easing is under consideration.
The unemployment rate dropped to a three-year low in January, consumer confidence has surged and home sales have climbed. The Dow Jones Industrial Average yesterday closed above 13,000 for the first time since 2008. 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.
Stocks and Treasuries fell as Bernanke’s comments damped speculation of more easing to bolster the economy. The Standard & Poor’s 500 Index fell 0.4 percent to 1,366.84 at 11:26 a.m. New York time after rising as much as 0.4 percent. The yield on the 10-year Treasury note rose to 1.98 percent from 1.94 percent late yesterday.
“We have seen some positive developments in the labor market,” Bernanke said. Still, “The job market remains far from normal: The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high.”
Bernanke also said that inflation is likely to “remain subdued” 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.
“Looking farther ahead, 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.”
Bernanke didn’t discuss options for further easing in his testimony today. When he last appeared before Congress in July, he outlined steps that the FOMC subsequently took in their August and September meetings.
“Monetary policy is not a panacea,” he said in response to a question today. “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.”
The Fed said in January economic conditions may warrant holding interest rates near zero through at least late 2014, extending the previous date of mid-2013 adopted in August. In September, the central bank said it would replace $400 billion of short-term debt with longer-term debt in a bid to drive down interest rates, a move known as Operation Twist.
Fed officials were keeping open the option of a third round of bond purchases at their January meeting in case the economy weakens or inflation falls too low. “A few” members of the Federal Open Market Committee said economic conditions could warrant buying assets “before long,” and others indicated that action would become necessary if the “economy lost momentum” or price gains seemed likely to remain lower than the Fed’s 2 percent goal, according to minutes of the meeting.
Bernanke said the FOMC’s announcement of a 2 percent inflation target in January 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 committee’s forecasts from January suggest policy makers see a higher deviation in unemployment than inflation. Those forecasts showed the committee 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.
By contrast, the committee forecasts the unemployment rate, currently at 8.3 percent, to be in a range 6.7 percent to 7.6 percent in 2014, or as much as 1.6 percentage points above their longer-run estimate of full employment of 6 percent. That indicates that the committee sees a higher deviation in employment from their mandate and a longer period for it to return to the goal compared with inflation.
Bernanke said today that “in light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however, it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.”
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.
The Standard & Poor’s 500 index has rallied almost 25 percent since reaching the lowest level of 2011 on Oct. 3. The yield on the 10-year Treasury note was 1.94 percent yesterday, up from 1.72 percent on Sept. 22.
Stocks have risen as the U.S. economy has shown signs of strengthening this year. 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.
The economy added 243,000 jobs in January and is forecast to add 213,000 in February, according to the median estimate of a Bloomberg survey. The unemployment rate dropped to 8.3 percent last month, the lowest in three years.
“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.”
Home prices have continued to drop even as confidence in the economy improves. The S&P Case-Shiller index of property values in 20 U.S. cities fell 4 percent in December from a year earlier, a report yesterday showed.
Bernanke sent a Fed study on the U.S. housing market to Congress last month. In a cover letter, he said “restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.”
The Fed chairman said policies that would help resolve the housing market could include programs to ease the conversion of foreclosed properties to rental properties. Avoiding foreclosure through “a broad menu” of loan modifications could also help minimize foreclosures, he said.
Republican Senators Orrin Hatch of Utah and Bob Corker of Tennessee rebuked the Fed for overstepping its role by making policy recommendations to Congress. Bernanke was also criticized earlier this month by Representative Scott Garrett, a New Jersey Republican, for intruding into fiscal policy.
Criticism of Bernanke has also flared in the race for the Republican nomination for president, with candidates Mitt Romney and Newt Gingrich saying they wouldn’t keep Bernanke as Fed chief. Former Pennsylvania Senator Rick Santorum has said his policies are “wrong for America.” Bernanke’s four-year term as chairman expires on Jan. 31, 2014.
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