Bernanke says economy still faces headwinds
Federal Reserve Chairman Ben Bernanke said in prepared testimony to Congress Wednesday that a reduction in its bond-bond stimulus does not foreshadow a rise in short-term interest rates.
The Fed's benchmark short-term interest rates could remain "near zero" for "a considerable time" after its bond-buying ends, Bernanke said in testimony scheduled to be delivered to the House Financial Services Committee at 10 a.m.
Bernanke and other Fed policymakers have taken pains recently to assure jittery financial markets that they plan to keep the Fed's benchmark short-term interest rate near zero at least until the 7.6% unemployment rate falls to 6.5%, and likely beyond that.
The Fed chairman said in his prepared testimony that the Fed would not consider a decline in unemployment to 6.5% "a sufficient reason" to raise its short-term rate if, for example, the drop was due to fewer people working or looking for work. That, in fact, has been a prominent factor recently in the fall in unemployment.
Bernanke said the recovery recently "has continued at a moderate pace, noting the housing market's rebound and job growth of about 200,000 a month so far this year. But he said the labor market was "far from satisfactory."
He noted the high level of long-term unemployment and the many Americans working in part-time jobs who prefer full-time work as well as those who have given up looking for jobs. Still, his assessment was a slight upgrade from previous testimony that called the job market "weak."
Markets have been volatile since May 22, when Bernanke told Congress the Fed likely would begin to pare back its extraordinary stimulus later this year amid recent improvements in the labor market. Stocks and bonds fell further last month, pushing up bond yields, after Bernanke said the central bank could end the stimulus in mid-2014, assuming the jobless rate declines to 7% by then.
The Fed is buying a $85 billion a month in government bonds to hold down long-term interest rates and spur economic activity.
Many investors interpreted Bernanke's remarks to mean that the Fed likely would raise its benchmark short-term rate — known as the fed funds rate — in 2014, rather than 2015 as anticipated. But markets rallied last week after Bernanke said the funds rate likely would stay near zero well after the unemployment rate falls to 6.5% as long as the annual inflation outlook is below 2.5%.
Bernanke also noted that federal spending cuts could dampen economic growth in coming months, forcing policymakers to maintain the bond-buying at full throttle for a longer period.
The economy recently has felt the effects of the federal budget cutbacks, known as sequestration, with manufacturing activity and retail sales weakening. Many economists estimate the economy grew at well under a 1% annual rate in the second quarter, following tepid 1.8% growth in the first quarter.
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