The economic recovery needs to be "established" before the Fed starts to "normalize policy," Federal Reserve Board Chairman Ben Bernanke said Tuesday.
Addressing the FOMC's recent move to say rates will remain highly accommodative until mid-2015, Bernanke said, "we are not saying that we expect the economy to remain weak until mid-2015."
The move means, "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," Bernanke told the New York Economic Club, according to prepared text released by the Fed. "In other words, we will want to be sure that the recovery is established before we begin to normalize policy. We hope that such assurances will reduce uncertainty and increase confidence among households and businesses, thereby providing additional support for economic growth and job creation."
Despite recent improvement in the economy, Bernanke said headwinds remain, most notably U.S. fiscal policy, the housing sector and the financial sector. "The harm inflicted by the financial crisis has yet to be fully repaired in important segments of the financial sector. One example is the continued weakness in some categories of bank lending," he said.
Going forward, challenges include the "so-called fiscal cliff." Bernanke reiterated the federal budget is on an unsustainable path. And, while attending to that stress, policymakers need "to avoid unnecessarily adding to the headwinds that are already holding back the economic recovery."