Thursday 17 October 2019

Bernanke offers no hint of pullback in Fed stimulus

THE Federal Reserve's monetary stimulus is helping the U.S. economy recover but the central bank needs to see further signs of traction before taking its foot off the gas, Fed Chairman Ben Bernanke said on Wednesday.

In testimony that offered no sign that he is ready to retreat from the Fed's latest round of bond buying, Bernanke emphasized the high costs of unemployment and inflation that continues to run below the Fed's target.

"Monetary policy is providing significant benefits," Bernanke told the congressional Joint Economic Committee, citing strong consumer spending on autos and housing, as well as increases in household wealth.

"Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed's) 2pc longer-run objective."

Bernanke's remarks helped lift U.S. stock prices and further drove up prices for U.S. government bonds.

Bonds had found support earlier from comments from the head of the New York Federal Reserve Bank that suggested the Fed would not consider trimming its bond-buying stimulus for several months.

The central bank is currently buying $85bn in Treasury and mortgage bonds each month in an effort to keep borrowing costs low and encourage investment, hiring and economic growth. It is the third round of asset purchase, or quantitative easing, since the Fed drove interest rates to near zero in late 2008.

"I believe the Fed, while feeling more confident in the economy bottoming, is not yet comfortable with ending QE and the U.S. economic crutch it offers," said Douglas Borthwick, managing director of Chapdelain Foreign Exchange in New York.

MISSING THE TARGET

Bernanke noted that the main inflation gauge the Fed monitors rose just 1pc in the 12 months through March, just half the central bank's 2pc target.

Part of the reason, he said, was a decline in energy prices. But there were also indications of more broad-based disinflation, Bernanke said.

Bernanke reiterated that the Fed was prepared to either increase or reduce the pace of its bond buys depending on economic conditions, as the central bank stated on May 1 after its last policy meeting.

U.S. economic growth rose to a 2.5pc annual rate in the first quarter following an anemic end to 2012. Unemployment has fallen to 7.5pc from a peak of 10pc, but remains, as Bernanke put it, "well above its longer-run normal level." Recent economic data have been mixed.

Reuters

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