WASHINGTON — Federal Reserve Chairman Ben Bernanke Wednesday said the Fed is not increasing the amount of monetary stimulus by converting $45 billion in "Operation Twist" purchases to outright purchases, contrary to what some Fed officials have said.
Bernanke, talking to reporters after the Fed's policymaking Federal Open Market Committee announced continuation of $85 billion per month in bond purchases and set thresholds for keeping the federal funds rate near zero, Bernanke emphasized that the Fed's asset purchase program is "flexible."
He said Fed is "prepared to vary" the amount of monthly asset purchases, depending on how economic conditions evolve. If the economy weakens, perhaps because of unsatisfactory resolution of the "fiscal cliff," he said "we might increase a bit," but if the economy proves stronger the Fed would do less bond buying.
Bernanke said that, in setting a 6.5% threshold for unemployment and 2.5% inflation, the Fed has not changed its weighting of inflation and unemployment in its policy calculations.
Bernanke also stressed that the setting of a 6.5% unemployment threshold will not be used as a "trigger" for monetary tightening — only a reason to start considering rate hikes.
When the Fed does begin raising rates, he said it would do so "gradually" and not necessarily right after unemployment goes under 6.5%. If inflation stays low as expected, rate increases would be "moderate," he said.
Bernanke made a distinction between the FOMC's "quantitative" guidance on the federal funds rate and its "qualitative" guidance on asset purchases, arguing that it is easier for the Fed to provide numerical thresholds on the funds rate than for quantitative easing.
He argued in favor of being "proactive" to get the economy moving and insulating it against shocks, but denied that the FOMC's latest actions amounted to additional stimulus.
Last week, St. Louis Federal Reserve Bank President James Bullard suggested that if the FOMC was going to replace the $45 billion "Operation Twist" it should replace only $25 billion of it, leaving a total of $65 billion in quantitative easing.
Bullard contended that $85 billion in outright bond purchases would constitute a net, additional easing of monetary policy and calculated that $65 billion would keep the level of accommodation roughly the same.
But Bernanke said that in replacing the expiring Twist purchases with outright Treasury purchases, the FOMC was "really just following through" with what it did in September, when it announced $40 billion in monthly MBS purchases on top of the previously extended $45 billion Twist purchases.
"I think this is really a continuation of what we said in September," he said. "I don't think relative to what we did last month that we've added accommodation ... . The amount of stimulus is more or less the same."
Before Bernanke's news conference, the FOMC announced that it will replace $45 billion in expiring "Operation Twist" Treasury bond purchases with a like amount of Treasury bond buying financed by the creation of new bank reserves. And it extended planned purchases of $40 billion per month of mortgage-backed securities — making a total of $85 billion in "quantitative easing."
The FOMC said the asset purchases will continue until there is "substantial" labor market improvement.
Also, for the first time, the FOMC abandoned its practice of setting an anticipated calendar date for the beginning of funds rate hikes, most recently mid-2015, and replaced it with numerical thresholds.
After asserting that it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens," the FOMC said it expects to keep the funds rate in a zero to 25 basis point range "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.