Bernanke warns against hitting the brakes too soon
May 22, 2013 by Annalyn Kurtz @AnnalynKurtz
The U.S. economy is on stronger footing than a year ago, but Ben Bernanke wants to be careful not to squelch the recovery now.
“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,” the Federal Reserve Chairman told the U.S. congressional Joint Economic Committee on Wednesday.
The Federal Reserve has kept its key short-term interest rate near zero since December 2008, and expects it to stay there for a “considerable time” as the recovery strengthens, Bernanke said.
The central bank is also engaged in a controversial stimulus policy known as quantitative easing, in which it buys $85 billion a month in mortgage-backed securities and Treasury bonds. The policy is intended to reduce long-term interest rates, and thereby stimulate the economy through various channels.
Low mortgage rates, for instance, have played a key role in the housing recovery, allowing some homeowners to refinance and giving buyers an incentive to purchase a home, Bernanke said.
The housing recovery has also boosted construction and real estate jobs, he noted. Since 2011, those two industries have added about 416,000 jobs, according to the Bureau of Labor Statistics.
It’s unclear, though, how effective the policy has been in healing the job market overall. The economy lost 8.7 million jobs in the aftermath of the financial crisis, and has since gained only about 6.2 million jobs back.
As of April, the unemployment rate was 7.5% — an improvement from its high of 10% during the financial crisis, but still well above its pre-recession level. Just six years ago, the unemployment rate was at 4.5%.
Bernanke cited his concerns about not just unemployment, but also underemployment. About 8 million people are working part-time even though they would prefer full-time work.
“High rates of unemployment and underemployment are extraordinarily costly,” Bernanke said.
Meanwhile, quantitative easing is credited for stoking stocks to record highs. Some critics, including hawkish members of the Fed, also blame it for fueling bubbles in other assets, including junk bonds and farmland.
Bernanke reiterated Wednesday that the Fed is closely watching for indications of financial instability, including signs that low interest rates may spur investors to “reach for yield” and turn to riskier assets.
The Fed is aiming to keep short-term interest rates near zero until the unemployment rate falls to 6.5% or inflation exceeds 2.5% a year. By the Fed’s own forecasts, that scenario is not likely to happen until at least 2015.
The Fed expects to wind down quantitative easing before then, but the timing is not yet clear. Fed watchers have recently been parsing every word out of officials’ mouths for hints. Bernanke offered little on that in his prepared testimony Wednesday, but all eyes are on his Q&A with lawmakers for more details.
At risk of sounding like a broken record, Bernanke also repeated the same advice he’s been giving Congress for years: Congress and the Obama administration should focus on supporting the recovery now, he said, while bringing the country’s finances in order over the longer term.
