WASHINGTON — Federal Reserve Chair Ben Bernanke Wednesday made it clear that incoming economic data will guide the Fed's actions regarding its aggressive bond-buying, while stressing that overall policy will remain "highly accommodative" even after the $85 billion a month program concludes.
Delivering the semiannual Monetary Policy Report to Congress, Bernanke also told members of the House Financial Services Committee that he believes markets now understand the message that policymakers have been trying to get across concerning the future of the asset purchases.
Depending on how the economy evolves, Bernanke said the FOMC is considering "changing the mix of tools that we use to maintain the high level accommodation."
On the subject of the central bank's unconventional policies, the Fed "has to do something," Bernanke said in response to one lawmaker's questions, "we are better off trying to do something than not."
"Our intention is to keep monetary policy highly accommodative for the foreseeable future and the reason that's necessary is because inflation is below our target and unemployment is still quite high," he said. "In terms of asset purchases, though, I've been very clear that we're going to responding to the data and if the data are stronger than we expect we'll move more quickly, at the same time maintaining the accommodation through rate policy."
Echoing his prepared testimony, Bernanke then added that, "If the data are less strong, if they don't meet the kind of expectations we have about the way the economy's going, then we would delay that process or even potentially increase purchases for a time."
"So we intend to be very responsive to incoming data, both in terms of our asset purchase program but it's also very important to understand that our overall policy, including our rate policy, is going to remain highly accommodative," he said.
Bernanke said long-term unemployment and under-employment remain indicative of a weak labor market, and warned that the U.S. is still "far above" the longer-run unemployment rate.
However, and most importantly, "So far we don't see much evidence that the structural component of unemployment has increased very much during this period ... So far it still appears to us we can attain an unemployment rate - we, the country - can attain an unemployment rate somewhere in the 5s," he said.
The markets reacted violently when the Fed's policymaking Federal Open Market Committee first unveiled its prospective timeline for the future of the asset purchase program back in June, saying it would begin tapering later this year if economic improvement continues, and will aim to end by mid-2014, when they forecast unemployment to be at 7%.
"I continue to believe that we should do everything we can to apprise the markets and the public about our plans and how we expect to move forward with monetary policy," Bernanke said.
He defended the Fed's decision to make public the timeline, arguing that not speaking about these issues "would have risked a dislocation, a moving of market expectations away from the expectations of the committee."
"So I think it's very important that we communicate as best we can what our plans and our thinking is. I think the markets are beginning to understand our message and the volatility has obviously moderated," Bernanke said.
As for the 7% unemployment expectation by mid-2014, Bernanke stressed it is not a target. "It was intended to be indicative of the amount of improvement we want to see in the labor market," he said.
Senior Fed officials, however, are not in complete agreement regarding the future path of monetary policy, and the Fed chair acknowledged that there are many voices with "a lot of different views."
"If people are looking for a single signal, it can be a little confusing," he said.
Commenting on the recent rise in bond yields, Bernanke said one reason for that is likely because economic news has been "a little better," another is that some "excessively risky" positions were unwound in the last month or two as the FOMC communicated its policy plans.
"The tightening associated with that is unwelcome, but on the other hand - at least - there is the benefit of perhaps reducing some of those positions in the market," he said.
In addition, mortgage rates have also been on the rise in recent months, and Bernanke said the Fed has to stay vigilant. "We do have to monitor that and we'll see how housing and house prices go from here," he said.
And although housing starts data released Wednesday morning was "a little bit weaker" - with the rate of starts slowing in June - Bernanke said he was not taking "too strong a signal" from the report.
The Fed will be watching to see if the movement in mortgage rates has any "material effect" on housing, Bernanke said. "If we think that mortgage rate increases are threatening that progress, then we would have to take additional action in the monetary sphere," he said.
As for those concerned about the Fed's large footprint in the bond markets, Bernanke countered that the central bank owns "a relatively small share" of all the Treasuries outstanding. "We have not seen that our purchases are disrupting the Treasury market in any way," he said.
When time comes to exit and begin withdrawing monetary stimulus, Bernanke is confident the Fed can execute its plan. "We know how to exit, we know how to do it without inflation," he said.
Bernanke also faced a lot of questions on current fiscal policy, and he warned that "policy is focusing a bit too much on the short run, and not enough on the long run," citing the sequester and payroll tax increases as an example.
Bernanke also commented on policies outside these borders, particularly with regarding China and Japan.
He said there are "fundamental differences" between China's policy and Japan's policy.
"China has managed its exchange rate and kept it for many years below equilibrium level in order to increase its exports," he noted. On the other hand, Japan is trying to eliminate deflation and is not focused on its exchange rate.
"A side effect of that is that the yen has weakened," Bernanke said.
"I think that, it is in our interest, though, to see Japan strengthen, to see their economy grow faster," he continued. "It will increase our market there as well as the competitive supply and over time, if they do in fact achieve positive inflation, that increase in prices there will partially offset the exchange rate movement."
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See
