WASHINGTON — Federal Reserve Chair Ben Bernanke Thursday told lawmakers it is too soon for the central bank to decide exactly when in the latter half of the year it will begin slowing the pace of its $85 billion a month in asset purchases.
On day two of what many believe will be his final semiannual testimony to Congress on monetary policy, Bernanke also told the Senate Banking Committee that even when the Fed halts its bond buying, a "potentially lengthy period" will follow before it begins to raise interest rates.
Right now, the Fed is not thinking about tightening monetary policy, he emphasized.
The economic data received since the June 18-19 FOMC meeting have been "mixed" Bernanke said when asked by one lawmaker on when exactly the Fed would begin tapering its asset purchases.
"So I think it's way too early to make any judgment," he said in response to a query from Sen. Chuck Schumer of New York. "We'll be obviously reviewing the data, and what we're looking for is a pickup as the year progresses."
The sequester and the hike in payroll taxes have slowed U.S. economic growth, and Bernanke acknowledged that it will be hard to know when those effects will wear off.
"If the economy begins to move beyond that point and fiscal restraint becomes somewhat less pronounced then we should see, as you suggested yourself, a pickup in growth," he said.
Schumer pressed the point, asking if the September date for the beginning of tapering is immutable.
"We're going to obviously look at the data," Bernanke replied. "It's a committee decision. It's going to depend on whether we see the improvement which I've described."
Economic projections that accompanied the released of the June FOMC meeting showed that about half of the participants said, based on their outlooks, it would be appropriate to end asset purchases by the end of this year.
Following that meeting, however, Bernanke announced that the FOMC expects to halt its bond buying by the middle of 2014, if the recovery proceeds as expected.
Asked to comment on the discrepancy, Bernanke said: "There are diverse views, obviously, on this program and in particular, people could see an early wind-down because they're optimistic about the economy or because they don't think QE is very effective. There are a lot of different reasons why you might have that view."
He went on to assure the Senate panel that "the general scenario which I described in my press conference was broadly supported by people on the committee including both voters and non-voters."
Asked if he believes the U.S. could still be on a path to improving labor markets even with this relatively weak growth, Bernanke replied that it is possible. "I think again, it's only been a few weeks since the June meeting and I think we have new data."
Interest rates have risen in recent weeks on the belief that tapering, and then halt to QE would soon be followed by a tightening of monetary conditions by the Fed.
Bernanke stressed, however, that the central bank's policy right now has not changed. "We are not talking about tightening monetary policy."
The goal is to inform on how the Fed's moves going forward are tied to the economy, he said, adding, "I want to emphasize that none of that implies that monetary policy will be tighter at any time within the foreseeable future."
In the early part of the hearing, Bernanke was asked to lay out the process by which the Fed would go about normalizing its monetary policy. He described a three-stage process, the first part of which is dependent on the economy strengthening, the labor market continuing to normalize and inflation beginning to move back towards the FOMC's 2%.
During this stage, the Fed would moderate the pace of its asset purchases "eventually bringing those to zero additional purchases at the point that we can say that we've made substantial improvement in the outlook for the labor market and we've given some guidelines about how that process would go forward, Bernanke said.
Next would come "a potentially lengthy period in which we are watching the economy for continued improvement, continued reduction in unemployment, normalization of inflation," he continued. When unemployment gets to 6.5% (the FOMC's threshold) "and not before," when inflation is looking closer to target, "at that point we would consider whether tightening in the form of raising short-term interest rates is appropriate," he said.
"The final stage would be the ultimate normalization of policy, the raising of short-term interest rates and eventually the normalization of our balance sheet," Bernanke said, adding that assuming the economy remains in a slow-growth mode, "that process will be a very gradual process."
Even after the Fed stops buying bonds, Bernanke is confident that it will be to be able to keep monetary policy highly accommodative. "We will be able to maintain that high level of accommodation ultimately through rate policy and by holding a very large balance sheet," he said.
"In making that transition to a different stage of this process, we, again, are intending to keep policy highly accommodative," Bernanke added.
At the same time, the Fed remains cognizant of the risks that its unconventional policies pose to financial stability, especially keeping interest rates very low for an extended period of time.
"We are trying to address that," Bernanke said, "primarily through regulation, through oversight, through monitoring, and that's our first line of defense certainly."
"We have tried to greatly increase our vigilance," he added. "We do take into account these costs and risks when we debate our monetary policy."
Bernanke also took the opportunity to renew his call for Congress to ease the load on the Fed and do more to boost the economy. "It is true that monetary policy, I think, has carried an awful lot of the burden for this recovery, and we'd be more than happy to share that burden more equally with fiscal policy," he said.
The Fed going it alone in trying to stimulate growth is not producing the sort of results everyone would like, he said, "monetary policy is not a panacea, there is still plenty of room for Congress to address some of these problems." However, he said it is not up to the Fed to threaten higher rates or prescribe what policies Congress should adopt.
The questions Bernanke faced where not just limited to asset purchases and broader monetary policy, he was also asked to comment on ballooning student loan debt, bank capital standards, and gold prices.
Regarding student loans, he said the massive amount of student debt is not likely to cause "sharp instability" for the economy, although it could present a fiscal risk for the government.
Regarding the Basel III capital standards, Bernanke said he viewed the requirements "as a floor, not a ceiling." He added that U.S. bank regulators are prepared to take additional measures beyond Basel III to ensure the safety of the U.S. financial system.
Since the Fed began introducing its unconventional policies to tackle the recession, and then spur faster growth, the Fed has faced accusations of devaluing the dollar — particularly from "goldbugs" and their chief proponent former Congressman Ron Paul.
While some buy gold as hedge against inflation, Bernanke said "the movements of gold prices don't predict inflation very well."
And in what could be considered a parting shot to those that flock to gold as protection against major crises, Bernanke concluded that "nobody really understands gold prices and I don't pretend to really understand them either."
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