WASHINGTON — Federal Reserve Chair Ben Bernanke Wednesday told lawmakers a highly accommodative monetary policy will remain appropriate for the foreseeable future, citing an unemployment rate that is still high and the slow pace of price increases.
In his semiannual monetary policy testimony to Congress, Bernanke also reiterated to the House Financial Services Committee that the Fed will continue buying bonds until its sees a "substantial improvement" in labor market conditions, and stressed that any decisions regarding the future of the program will depend on policymakers assessments of the economic outlook and cumulative progress made.
The Fed's policymaking Federal Open Market Committee is currently buying $85 billion a month in U.S. Treasury and mortgage bonds in order to spur faster growth and boost job creation.
It has also said it will keep interest rates exceptionally low so long as unemployment remains above 6.5% and inflation does not threaten to rise above 2.5%.
Bernanke reiterated that stance: "With unemployment still high and declining only gradually, and with inflation running below the Committee's longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future."
On the march toward speeding up job creation in the near term, "We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized," he said.
And even when the Fed does end its bond-buying, Bernanke said the central bank will look to the close-to-zero interest rate environment and the forward guidance "to help maintain a high degree of monetary accommodation for an extended period after asset purchases end."
Revisiting the FOMC's expected timeline for winding down the asset purchases - which Bernanke first touched on following the June FOMC meeting - he emphasized that the decision will depend on the outlook for the economy and the sum of all the progress being made towards the FOMC's objectives.
"If the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin to moderate the monthly pace of purchases later this year," Bernanke said.
"And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear," he added.
However, Bernanke also cautioned that while the asset purchases depend on economic and financial developments, "they are by no means on a preset course."
The FOMC could choose to taper the bond purchases "somewhat more quickly" if economic conditions were to improve faster than expected, and inflation appeared to be rising "decisively" back toward 2%.
On the other hand, "if the outlook for employment were to become relatively less favorable," and inflation remained mired below target, "the current pace of purchases could be maintained for longer."
"Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability," Bernanke said.
In recent weeks, some senior Fed officials have called on the FOMC to switch the 6.5% employment and 2.5% inflation numbers to triggers, and begin raising rates once either one is reached.
Bernanke does not appear to agree, however, reiterating that those levels are thresholds and reaching one "would not automatically result in an increase in the federal funds rate target."
Even once one of the thresholds are reached, Bernanke said the FOMC was unlikely to raise rates if the drop in unemployment was not due to job gains, or if inflation remained "persistently" below the FOMC's explicit 2% long-run target.
"Moreover, so long as the economy remains short of maximum employment, inflation remains near our longer-run objective, and inflation expectations remain well anchored, increases in the target for the federal funds rate, once they begin, are likely to be gradual," Bernanke added.
Casting an eye over economic conditions, Bernanke said the recovery has continued at the moderate pace despite "strong headwinds" from fiscal policy.
He appeared to not be overly concerned about the ongoing rise in mortgage rates, predicting that "housing activity and prices seems likely to continue to recover" notwithstanding.
As for the jobs situation, now the centerpiece of Fed policy, "conditions in the labor market are improving gradually," Bernanke said, although "the jobs situation is far from satisfactory as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high."
On inflation, Bernanke said some factors fueling the recent softness are likely to be transitory.
Still, the FOMC is aware of the risks posed by low inflation, he said.
"Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2% objective over time."
Looking ahead, Bernanke said the FOMC is predicting a pickup in the years ahead based on the assumption of a reduced drag from fiscal policy. "The Committee also believes that risks to the economy have diminished since the fall.:
That does not mean the FOMC does not remain on guard, he warned.
"The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect ... . More generally, with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated."
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