Bernanke: Fed Can Adjust Bond Buys Lower, But Also Higher

WASHINGTON - Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed is prepared to vary the rate at which it buys bonds, but gave no indication that he and a majority of his fellow policymakers are prepared to do so in the near future.

Bernanke asserted that the labor market has improved, but made clear he wants to see more improvement - along with proof that the improvement can be sustained.

If the economy doesn't grow fast enough, stronger job gains and reductions in unemployment cannot be sustained, and that is something the Fed will have to monitor, he said in reply to a question from MNI.

While the Fed could scale back its asset purchases, it could also increase them if the economy were to slump again, Bernanke said.

The Fed chief, in his quarterly press conference following a meeting of the Fed's interest rate-setting Federal Open Market Committee, said the FOMC is still studying ways that it might include balance sheet projections in its "forward guidance" but has been unable thus far to reach a consensus on how to do that.

Bernanke downplayed the impact of turmoil in Cyprus on U.S. financial markets.

Bernanke spoke to reporters after the the FOMC reaffirmed its intention to continue aggressively trying to stimulate the U.S. economy.

With only Kansas City Federal Reserve Bank President Esther George dissenting, the FOMC voted to continue buying $85 billion per month of longer term Treasury and mortgage backed securities to hold down long-term interest rates until there is "substantial" improvement in the outlook for the labor market.

Even after asset purchases have stopped and the economy has strengthened, the FOMC reiterated, it will maintain a "highly accommodative" monetary policy "for a considerable time." And it reaffirmed the policy of keeping the federal funds rate near zero, where it has been since December 2008, at least until the unemployment rate falls to 6.5% - provided headline inflation is not projected to rise above 2.5% and inflation expectations remain "well anchored."

Asked about the possibility of varying the rate of bond buying, Bernanke said there is no "single criterion" for halting or reducing bond purchases and no policy that "we maintain full speed ahead until we hit a certain target, and then we stop."

"That would be I think a very difficult for the markets to understand, to anticipate," he said. "We think it makes more sense to have our policy variable, which is the rate of flow of purchases, respond in a more continuous or sensitive way to changes in the outlook."

Bernanke said that "as we make progress towards our ultimate objective of substantial improvement, we may adjust the rate of flow of purchases accordingly ... . When we see that the conditions, the situation has changed, in a meaningful way, then we may well adjust the pace of purchases in order to keep the level of accommodation consistent with the outlook, and secondly to help provides markets with a sense of how much progress is being made so they can make better judgments."

To conclude that there has been "substantial improvement," he said the FOMC would be watching for "a broad-based improvement in a range of indicators as well as improvement in output in labor demand."

Bernanke said that "as we see a period in which the labor market is doing better and we have reason to think it might be stronger, then we might reduce accommodation at that point."

However, he stressed that "it works in both directions. If subsequently the labor market were to weaken, the outlook were to get worse, we can of course bring back accommodation back to the previous level."

When asked whether the Fed is getting to the point where it needs to scale back its asset purchases, Bernanke demurred, saying it is an assessment that the FOMC will have to make. But he strongly suggested the time for tapering is some ways off.

The FOMC "will at each meeting look at progress that has been made since the last meeting, try to assess the outlook, try to determine whether there has been a sufficient change to warrant a change in our policy stance," he said, adding that the Fed has "models and other indicators of the state of the labor markets to try to make a good estimate of how much we need to change the rate of flow."

Bernanke went on to assert that "obviously, there has been improvement. Let me say that."

"We have seen improvement in the last four or five months, last five months, for example," he said, noting that private payrolls have been growing over 200,000 per month, that the unemployment rates has come down 4/10 of a percent since September and that unemployment claims have fallen to their lowest level since the financial crisis.

"We are seeing improvements," he repeated.

However, Bernanke added that "one thing we would need is to make sure that this is not a temporary improvement."

"We have seen periods before where we have had as many as 300,000 jobs for a couple months," he said. "Then things weakened again. An important criterion would be not just the improvement that we have seen, but is it going to be sustained for a number of months?"

Following up on that point, MNI asked Bernanke whether he can be confident that recent labor market improvements can be sustained given that FOMC participants are forecasting slower economic growth even as they project lower unemployment.

"Well, if in fact that happens, it is an issue, obviously," he replied. "There has been some disconnect at least in the short run between unemployment rate changes and growth during this recovery. And there have been periods at least where unemployment has fallen relatively quickly, even though growth has been more limited. We are going to have to monitor developments in the economy, and see what happens."

"You are right, that we are not forecasting extraordinarily strong growth," he continued. "But it is also true, as I think you noted, that our projections for unemployment in the fourth quarter are noticeably lower than they were in September when we first announced this asset purchase program. So there has been some improvement in the outlook, as measured by that metric."

But Bernanke said "We do need to see a sustained improvement, one month, two months doesn't cut it. And normally, you would expect that you would need to see a reasonable pace of GDP growth in order to achieve that. We are going to  have to keep providing support for the economy, and see how things evolve."

In response to another question about whether the recent economic improvement could wane as in previous Spring periods, Bernanke said past such slowdowns may have been due to "seasonality" in the data. But now, he said, most of those statistical problems should be "washing out."

Now, "if we do see a slump," Bernanke said it will probably be "due to real causes."

And he said "we would respond to that," adding that the FOMC's flexibility to "adjust our tools ... could go in either direction."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER