Bernanke says no change for now

In testimony before Congress today, Bernanke explained why the Fed’s large-scale asset purchases are continuing.

Inflation as measured by the CPI or PCE deflator has been about 1% over the last year, while the most recent report put the unemployment rate at 7.5%. Bernanke observed:


With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy. Normally, the Committee would provide policy accommodation by reducing its target for the federal funds rate, thus putting downward pressure on interest rates generally. However, the federal funds rate and other short-term money market rates have been close to zero since late 2008, so the Committee has had to use other policy tools….

Bernanke claimed that the tools the Fed has been using (forward guidance and large-scale asset purchases) have been having desirable effects:

In the current economic environment, monetary policy is providing significant benefits. Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment. Importantly, accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the Committee’s 2 percent longer-run objective.

Notwithstanding, the Fed chair noted some drawbacks to low interest rates in that they reduce income for savers and could lay the groundwork for future financial instability. But Bernanke suggested that ultimately the Fed’s policies will benefit these as well:

the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.

Bernanke also emphasized that the Fed is prepared to increase or decrease its level of large-scale asset purchases when conditions change:

At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes.

In the question-and-answer session, Bernanke further emphasized that the Fed is not announcing some calendar schedule for ending or tapering LSAP:

I want to be very clear that a step to reduce the flow of purchases would not be an automatic, mechanistic process of ending the program. Rather, any change in the flow of purchases would depend on the incoming data and our assessment of how the labor market and inflation are evolving.

When asked specifically if purchases would be lowered before Labor Day (September 2), Bernanke answered “I don’t know.”

So I guess I don’t either.

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18 thoughts on “Bernanke says no change for now

  1. Ricardo

    One of the best things to come out of Washington recently is the number of people who are admitting that they know absolutely nothing. President Obama knows nothing. Eric Holder knows nothing. The head of the IRS knows nothing. Hillary Clinton knows nothing. Press Secretary Jay Carney knows nothing. Finally, Ben Bernanke knows nothing.
    Isn’t it refreshing that so many people in Washington are admitting they know nothing.
    The only problem is that even though they know nothing they are pretending that they do know something. If they honestly know nothing why do they keep destroying things?

  2. Joseph

    Sen. Klobuchar asked Bernanke an interesting question in the hearing. What would Bernanke do differently if the dual mandate were eliminated and the only mandate were price stability.
    Bernanke’s answer — nothing.
    In other words, we may as well not even have a dual mandate because the Fed’s number one job has and always will be protection of bankers and the creditor class. Employment is only an afterthought and only if it serves growth in Wall Street’s interests. He remains poised to put his foot on the neck of wage earners the moment they show any leverage in gaining a share of soaring corporate profits.

  3. c thomson

    Wow! The time warp lives! “Foot on the neck of wage earners.” Magnificent! Joe Hill! The Wobblies! Keep it up, comrade. You are on message – for 1912.
    Personally I’d like to put a boot in the ass of every would-be high school drop-out and all those who moan about the consequent employment problems of such idiots.

  4. benamery21

    c thomson: on average in 2012, according to BLS, in the civilian non-institutional population age 25 and older, 84.5% of the ~9M unemployed had a high school diploma or higher. There were more prime working age folks unemployed with a 4 year degree than folks unemployed with less than a high school diploma, albeit at a lower rate of unemployment. I’m betting the average college loan indebtedness was lower among those without a diploma! While for all but actual “idiots,” completing high school should be expected; the failure of some to do so has almost nothing to do with the current status of the labor market.
    There IS a significant and obvious relationship between the available supply of unemployed skilled workers (artificially high due to austerity), record corporate profits and declining labor share of income.

  5. Edward Lambert

    It would have been better to start raising the Fed rate a year or more ago. My model says the Fed rate would be over 3% by now. I think Bernanke would like to raise the rate but he has no model to show why. His model says that with higher unemployment and low inflation, he has no other choice but to have loose monetary policy. My model shows that he is waging a losing battle against unemployment and inflation. Both are constrained by effective demand, a new concept that will prove itself with time.
    and Because it is useless holding out hope for 6.5% unemployment, it is better to raise the Fed rate and manage the instability being caused. You can read above he is aware of the instability.
    Here is the model of my monetary framework.
    http://effectivedemand.typepad.com/ed/2013/05/monetary-policy-of-effective-demand-the-basics.html

  6. Ricardo

    Joseph,
    You of the best comments you have ever posted here. It may make you uncomfortable but on this issue you and I totally agree.

  7. tj

    A bit of shock to global markets overnight. Equities down, interest rates popped up a bit.
    A key question is – How far can interest rates can rise?
    Assume Bernanke sparks a bond sell-off and interest rates spike. The global economy is too weak to survive a rate spike. Further, the level of debt in various countries is such that a spike in borrowing rates will force them to default and/or monetize debt.
    Monetizing government debt, sovereign default and global recession are not conducive to an environment that can sustain high borrowing rates.
    To compound matters, if the global economy manages to increase the rate of grow without sparking a spike in rates, then energy prices rise and dampen global growth.
    In both cases, a significant increase in global economic growth leads to either (A) a growth retarding spike in market interest rates, or (B)a growth retarding spike in energy prices.
    A feasible scenario is one in which global growth sputters along between recession and slow growth. This scenario removes growth as a solution to the world’s fiscal problems.
    I fear the ‘easy’ solution will be for governments to inflate their debt problems away instead of long run rebalancing of fiscal inflows and outflows.
    The energy problem will remain, requiring responsible long run investment in research and development in alternative energy, coupled with an aggressive short run policy to develop and exploit world wide natural gas and other fossil fuel resources.

  8. Nick

    @c thomson
    Thanks for summing up the right wing position. If you don’t do well in school, you are an idiot and deserve the consequences. Your lack of compassion or capacity for empathy is stunning.

  9. c thomson

    “Don’t do well in school?” What does dropping out of the typical American high school have to do with doing well academically? If you can walk through the doors, you will graduate.
    As to compassion, ritual bleating about predicable consequences isn’t compassion. It’s liberal snivel-think.
    Obesity, bad social habits, poor reading skills, low numeracy, fixed ideas about what you are willing to do – these too have much to do with US employment.

  10. c thomson

    Nope, Nick is wrong again. I’m a libertarian agnostic.
    Pascal said that the core of morality was clear thinking. Try it, Nick – might help. Go out in the real world and look around. Talk to people. Watch what they do; ignore the excuses they make.
    The US is overproducing people who are only marginally employable at the best of times – and those times are over, possibly for a long time.

  11. Nick

    @c thomson
    “I’m a libertarian agnostic.”
    Hahahaha.
    You might as well have said “I am too afraid to hold any actual beliefs, and only hold those that are convenient for me.”

  12. Chicken

    My FNMA position was up again, over 14% today, thanks no doubt to taxpayer largess and the ongoing rescue of the TBTF gamblers and look the other way good old beltway boys-club.
    Glad I’m not a saver sitting in negative rate treasuries, this banking sector rescue is easy pickin’s.

  13. Tom

    What’s interesting is how deliberately and methodically authorities are pursuing asset price inflation. It’s very different from the bubble years, when authorities didn’t recognize the connection between their policies and asset inflation, which they regarded as an inevitable byproduct of economic success. During the bubble asset inflation was more sloppy, supported less sustainably by private credit growth and especially subprime lending. Today it’s supported by central bank, GSE and federal government credit.
    It’s understandable that owners of land and equity would want to inflate the values of their assets. It’s also understandable that ideologies will arise claiming that doing so is for the benefit of all.

  14. Anonymous

    @c thomson
    “I’m a libertarian agnostic.”
    Hahahaha.
    You might as well have said “I am too afraid to hold any actual beliefs, and only hold those that are convenient for me.”
    He’s probably really an atheist. People who claim to be agnostic usually do so because they can’t prove there isn’t a God. I can’t prove there are no flying unicorns, but I’m not agnostic about them.

  15. Johannes

    Ben will retire soon and will do nothing.
    The real question, agonstic or not, is : will Janet Yellen take over ?
    Well James, please tell us what you think about Janet (and her doing in the Clinton years).

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