Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed’s easy-money policy is still necessary, throwing cold water on fresh market expectations that the Fed’s stimulus would soon be ended.
Bernanke told an audience of economists in Cambridge, Massachusetts, that the jobs market remains too weak and inflation remains too low for comfort.
He also warned that the full impact of steep government spending cuts initiated in March was yet to be seen.
Together, the evidence underscored the need for the Fed to keep in place its highly accommodative monetary policy, he said.
“Both the employment side and the inflation side are saying that we need to be more accommodating,” he said, answering questions after a speech.
“Moreover, the other portion of macroeconomic policy, fiscal policy, is now actually quite restrictive…. Put that all together, I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the US economy.”
His comments came just hours after the release of the minutes from the June 18-19 meeting of the Fed’s policy board, the Federal Open Market Committee, which suggested the central bank would move more rapidly toward winding up its $85 billion a month stimulus program.
The minutes said that about half of the FOMC policy makers wanted to fully end QE, or quantitative easing, by the end of this year, six months earlier than the mid-2014 timeline that Bernanke laid out to reporters after that meeting.
Bond prices sank after the release of the minutes, in anticipation of an earlier rise in interest rates from a Fed headed toward tightening monetary conditions.
But bonds headed back up just as quickly, and the dollar weakened, after Bernanke sent his more cautious message.
Bernanke said that the 7.6 percent unemployment rate, though far below its crisis peak, “if anything overstates the health of our labor markets.”
He pointed to the low overall participation rate in the job market, four years after the country emerged from a deep recession, and the high rate of long-term unemployment.
Both are barriers to the economy pushing toward full employment, one of the Fed’s two policy goals.
“So we’re not there, obviously, on the maximum employment part of the mandate,” he said.
On the other goal — price stability — inflation at the current one percent level is low, he said, and well below the Fed’s two percent target rate, and low enough to generate some worry about deflation.
“We expect inflation to come back up. But if that’s not the case, I think we have to say that that would be a good reason to remain accommodative and try to achieve that objective.”
Taken together, the minutes and Bernanke’s comments continued to send an unclear message about, at least, the timing of tapering QE.
Bernanke, as head of the Fed and the FOMC, ultimately sets the tone of policy, and so his words carry more weight in markets than the notes of the FOMC’s internal discussions.
However, Bernanke’s second term as chairman expires in January and he is not expected to stay on for a third to oversee the reeling in of QE.
Any more clarity on policy will have to come from data on the economy, said currencies specialist Sebastien Galy of Societe Generale.
“Overall the reactions of the market are fairly intense to small Fed nuances, an indication of some fundamental instability or great uncertainty in the market,” he said.