Bernanke Signals ‘Extended’ Low-Rate Period May Become Longer

By Scott Lanman

Nov. 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke’s diagnosis of a weak U.S. economy and labor market signaled that the central bank’s extended period of low borrowing costs may get even longer.

Bernanke said “significant economic challenges remain,” with lending constrained and the jobless rate above 10 percent. Speaking in New York yesterday, he said U.S. asset prices aren’t out of line with underlying values, and central bank policy will ensure that the “dollar is strong.”

Treasury two-year notes rose and the dollar weakened as investors reduced bets the Fed will raise interest rates by August. In his most extensive comments on the economy since July, Bernanke repeated the Fed’s Nov. 4 pledge to keep rates low for an “extended period,” and he said forecasters anticipate “moderate” growth this quarter after the 3.5 percent pace of expansion in the prior three months.

The Fed chief wants to “keep the liquidity spigot wide open for some time to come,” said Stephen Stanley, chief economist at RBS Capital Markets in Stamford, Connecticut. “Bernanke just locked the Fed into an easy monetary policy, at least in the short term, so any implicit threat of response to dollar declines simply has zero credibility.”

Traders trimmed wagers on Fed interest-rate increases next year, placing September as the most likely move instead of August, based on futures on the Chicago Board of Trade.

Dollar, Stocks

The yield on the two-year Treasury note fell four basis points, or 0.04 percentage point, to 0.77 percent yesterday in New York after touching 0.76 percent, the lowest level since Jan. 23. Stocks held gains, with the Standard & Poor’s 500 Index jumping 1.5 percent to 1,109.3, a 13-month high.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback’s value against six major currencies, touched 74.679, the lowest level since August 2008.

The labor market is an “area of great concern,” Bernanke, 55, a former Princeton University economics professor, told financial executives in Manhattan at a luncheon hosted by the Economic Club of New York.

“Jobs are likely to remain scarce for some time, keeping households cautious about spending,” he said. While payrolls will increase as the economy recovers, unemployment “likely will decline only slowly if economic growth remains moderate, as I expect.”

When Bernanke testified before Congress for two days in July for the Fed’s semiannual report on monetary policy, he elaborated on the central bank’s plans to unwind its unprecedented monetary stimulus, including raising interest rates from almost zero.

Exit Strategy

Yesterday, he devoted one sentence of his speech to the Fed’s exit strategy, saying in part that the central bank “will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.”

Since his July testimony, U.S. employers have eliminated 867,000 more jobs, and the unemployment rate climbed to a 26- year high of 10.2 percent in October from 9.5 percent in June.

“It’s going to be a very long time before the Fed starts using any tightening measures,” David Resler, chief economist at Nomura Securities International Inc. in New York, said in a Bloomberg Television interview. “Normally if we come out of a recession of the sort that we had, we should be talking about 7, 8 or 9 percent growth, and no one’s talking about that.”

In a question-and-answer session after the speech, Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the S&P 500 Index from its March low.

‘Fundamental Value’

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” Bernanke said. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

Fed Vice Chairman Donald Kohn, in a speech yesterday evening, echoed those remarks.

“The prices of assets in U.S. financial markets do not appear to be clearly out of line with the outlook for the economy and business prospects as well as the level of risk-free interest rates,” Kohn said at Northwestern University in Evanston, Illinois.

Bernanke and Kohn didn’t address complaints from officials in Asia that low U.S. interest rates are fueling surging prices of commodities as well as financial assets in emerging markets.

The price of gold has climbed 54 percent in the past year to $1,139.50 an ounce, reaching a record yesterday for the fourth time in six sessions. Crude oil is up 77 percent in 2009.

Bank of Japan Governor Masaaki Shirakawa said yesterday that emerging economies “might overheat and experience financial turmoil.” A day earlier Liu Mingkang, China’s top banking regulator, called risks from low rates and the dollar’s weakness “new, real and insurmountable.”

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.