Bernanke signals flexibility on bond purchases

WASHINGTON (AP) ? Ben Bernanke said Wednesday that the U.S. economy is gradually improving but emphasized that the Federal Reserve is not locked into any timetable for scaling back policies aimed at jolting growth.

The Fed chairman told Congress there is no "preset course" and that any decision to reduce its $85 billion-a-month bond-buying program will depend on how the economy performs. And he said that the Fed could maintain or increase those purchases if it sensed the economy was weakening.

The bond purchases have kept long-term interest rates low, spurred a stock market rally and encouraged more borrowing and spending.

The U.S. economy is getting a lift from the recovering housing market and steady hiring, Bernanke said. But it is being held back by domestic spending cuts and slower growth abroad. The Fed is also closely monitoring inflation, which has fallen below the Fed's 2 percent target.

"Because our asset purchases depend on economic and financial developments, they are by no means on a preset course," he told the House Financial Services Committee during the first of two days of testimony this week on the Fed's semi-annual report. He will appear Thursday before the Senate Banking Committee.

Investors interpreted Bernanke's comments to mean the Fed may not be in as much of a rush to trim its stimulus as previously thought. The Dow Jones industrial average rose 19 points to close up at 15,470. Broader indexes also gained on the day.

The yield on the benchmark 10-year Treasury note fell to 2.49 percent, down from 2.55 percent before Bernanke's comments were made public.

Bernanke's remarks were his latest attempt to calm markets, which have gyrated wildly since the Fed's June meeting.

Last month stocks plunged after Bernanke said the Fed could slow the bond purchases later this year and end them next year if the economy strengthens. Since them, Bernanke and other Fed members have stressed that any change in policy depends on improvement in the job market and economy, not a target date. That has helped push stocks to new highs.

On Wednesday, Bernanke noted that the job market has made some progress but the Fed wants to see "substantial progress" before reducing the bond buys.

"Despite these gains, the job situation is far from satisfactory," he said.

Bernanke also said the Fed plans to keep its benchmark short-term interest rate near zero as long as unemployment is above 6.5 percent. And the Fed could hold the rate down even after it falls below 6.5 percent, he said, particularly if unemployment declines because more people are leaving the workforce. The government counts people as unemployed only if they are actively looking for a job.

The job market has accelerated since the bond buying began in September. Employers have an average of 202,000 jobs a month this year, up from 180,000 in the previous six months. Still, unemployment remains high at 7.6 percent, and economic growth has been weak for the past three quarters.

Bernanke has said that he thought the unemployment rate would be about 7 percent when the bond buying program ends.

"What Bernanke did today is try to contain the damage from what was a communication misstep in June and I think he succeeded," said Brian Bethune, an economics professor at Gordon College in Wenham, Mass. "The Fed in June saw that even the smallest hint of a change in Fed policy can turn out to be extremely powerful in terms of its impact on financial markets."

Bethune predicts the Fed will hold off on any policy change in September because there will not be enough data to show that economic growth has strengthened. Bethune said the earliest the Fed could announce a reduction in the bond purchases would likely be December.

Still, other economists believe the Fed is still on track to slow them in September.

Paul Dales, senior U.S. economist for Capital Economics, said Bernanke's remarks did not alter that view. Of course, Dales said Bernanke made it clear that any change would depend heavily on the economy's health.

"We don't think this forward guidance could be much clearer," Dales said.

Bernanke spent a good part of the three-hour hearing addressing other topics beyond the Fed's low interest rate policies:

? He reminded lawmakers that their fiscal policies are having an adverse effect on the economy. Higher taxes and deep federal spending cuts could reduce growth by 1.5 percentage points this year. Bernanke said the impact of those policies should begin to wear off in the second half of this year, but there was a risk that the damage could linger.

? He warned that a failure by Congress to approve an increase in federal government's $16.7 trillion borrowing limit sometime this fall could be harmful to the economy and unsettling to financial markets.

? He said regulators have more work ahead to put the 2010 financial overhaul law into effect. Additional rules must be written to reduce the risk of financial firms collapsing and bringing down the financial system. Thanks to the overhaul rules that have been put in place, that possibility is less likely, but the threat "is not gone," Bernanke said.

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Source: http://news.yahoo.com/bernanke-signals-flexibility-bond-purchases-192735917.html

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