WASHINGTON — Federal Reserve Chairman Ben Bernanke Tuesday night drove home the message that the central bank will not step back from its aggressive stance in support of the U.S. economy — even when it ends its $85 billion a month in bond purchases.
Taking questions after a speech to the National Economists Club, Bernanke stressed that the two tools being used by the Fed, asset purchases and threshold forward guidance, work differently and possess different costs and benefits.
"So we are using them not in a completely parallel way," he said.
The asset purchases are being used in the first stage of the "booster rocket" to spur the economy, Bernanke explained, "but even when asset purchases do eventually end ... we expect that rates will remain low past the (6.5%) unemployment threshold and beyond until such time as there's good evidence that the economy can sustain higher interest rates."
Until that time comes, he continued, "We want to maintain a highly accommodative policy to make sure that we do meet both of our employment and inflation objectives - both of which are calling for more accommodative policy."
So asset purchases and forward guidance are separate tools, Bernanke said, "and the mix of those tools will change somewhat over time."
For now, the fundamental commitment of the policymaking Federal Open Market Committee to meeting its objectives - "which is going to require sustaining accommodation in policy" - remains, he said.
Commenting on the decline in the U.S. labor force participation rate, Bernanke said the trend of falling participation is beyond the control of monetary policymakers.
"What we'd like to do is try to make use of our limited resources to eliminate the slack in the labor markets," he said, "so we are going to have to try to make a judgment, as we go forward, about how much of the decline in the labor force participation is trend and how much reflects temporary slack."
"We'll get some clues when the economy strengthens enough, when the labor market strengthens enough that we begin to see people coming back in to the labor force. That will give us some evidence about how much of this decline in labor force participation is cyclical, how much is secular," he said.
In trying to judge the health of the labor markets, Bernanke said the FOMC will not just be looking at the unemployment rate but also other factors, "and the cyclical component of declining participation is one of the more difficult things to measure, but is one of the things we consider as we evaluate the state of the labor market."
Bernanke also had some words for the negative impact fiscal policy has had on the past year, and urged U.S. lawmakers to craft measures that are "less restrictive" in the near term in order to give the economy a chance to return to a more healthy state.
Despite fiscal policy working in an opposite direction to monetary policy, Bernanke defended the Fed's efforts, noting that the economy has been growing, jobs have been coming back "and the Fed has been an important factor in maintaining the momentum in job creation."
He said the Fed has helped drive down interest rates, which aided the housing recovery and is helping U.S. households improve their balance sheets and put themselves in a better financial position.
"The Fed is making an important contribution to the middle class and lower income folks," Bernanke said.
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