Bernanke: Fed flexible on buying bonds - MyFoxAustin.com | KTBC Fox 7 | News, Weather, Sports

Bernanke: Fed flexible on buying bonds

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By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON (AP) -- Chairman Ben Bernanke said Wednesday that the Federal Reserve's timetable for reducing its bond purchases is not on a "preset course" and the Fed could increase or decrease the amount based on how the economy performs.
 
Bernanke told lawmakers that the job market has made some progress since the Fed began buying $85 billion a month in bonds in September, as part of his mid-year economic report to Congress. And he repeated his belief that the Fed could slow that pace later this year if the economy strengthens.
 
But Bernanke cautioned that the Fed wants to see substantial progress in the job market before scaling back the bond purchases. If conditions worsen, the Fed could maintain its current pace or even increase it. The bond purchases are intended to keep long-term interest rates low and encourage borrowing and spending.
 
"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. It's the first of two days of testimony this week on the Fed's semi-annual report.
 
Bernanke said that a number of factors could influence the Fed's thinking.  U.S. economic growth could be restrained further by a weaker global economy or federal spending cuts and tax increases. Inflation could remain well below the Fed's 2 percent target. And the unemployment rate could drop because people are leaving the workforce -- not because they are getting jobs.
 
Investors reacted positively to Bernanke's remarks. The Dow Jones industrial average was up 30 points in the first hour of trading. And the yield on the benchmark 10-year Treasury note fell from 2.55 percent to 2.50 percent minutes after the text of his comments were released as investors bought government bonds.
 
Paul Dales, senior U.S. economist for Capital Economics, said Bernanke's comments did not alter his view that the Fed would likely start reducing its bond purchases in September and end them completely by the middle of next year. But Dales said this would be contingent on how the economy performs.
 
"We don't think this forward guidance could be much clearer," Dales said.
 
Bernanke's remarks expanded on the views he and other Fed officials have made in recent weeks to try and calm turbulent markets.
 
The Dow Jones industrial average plunged by 560 points in the two days after Bernanke's initial comments at a news conference following the Fed's June meeting. Since then, various Fed officials have tried to assure investors that the Fed's timetable is based on economic performance -- and not a calendar date. That's helped to restore investor confidence and the Dow and other market indicators have climbed to new highs.
 
Hiring has improved since the Fed's bond buying began. Employers have created an average of 202,000 jobs a month this year, up from 180,000 in the previous six months.
 
Still, unemployment remains elevated at 7.6 percent, and economic growth has been modest the past three quarters.
 
In his testimony, Bernanke again said "a highly accommodative monetary policy will remain appropriate for the foreseeable future" because unemployment remains high and inflation is below the Fed's target of 2 percent.
 
Bernanke also repeated that the Fed plans to keep its benchmark short-term interest rate near zero as long as unemployment is above 6.5 percent. But Bernanke said the Fed could hold the rate lower even after it falls below 6.5 percent, particularly if unemployment falls because more people are leaving the workforce. The government counts people as unemployed only if they are actively looking for a job.
 
Bernanke said the economy is growing at "moderate pace" despite the adverse effects of tax increases and federal spending cuts. He noted that the housing market is rebounding and the job market has gradually improved.
 
"Despite these gains, the job situation is far from satisfactory," he said.
 
The economy grew at a subpar 1.8 percent annual rate in the January-March quarter. Many economists think growth in the April-June quarter weakened to an annual rate of 1 percent or less. That would make the third straight quarter of a growth rate below 2 percent.
 
Many expect growth will rebound in the second half of this year.
 
The Fed forecasts that the economy will grow between 2.3 percent and 2.6 percent this year, which is more optimistic than many economists predict. The pickup in economic growth that Fed officials expect is based in part on an assumption that the adverse effects of the tax increases and government spending cuts will diminish over time. And it assumes that the overall risks to the economy are lower now than they were when the central bank began the latest bond-buying program.

But he said threats remained. The federal budget policies could restrain growth for longer than expected. Or a congressional battle later this year over raising the government's borrowing limit could once again rattle investor and consumer confidence.

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