By Joshua Zumbrun and Jeff Kearns - Mar 1, 2012 10:00 PM GMT+0700
Federal Reserve Chairman Ben S. Bernanke said elevated unemployment and subdued inflation mean interest rates are likely to stay low, without offering any sign that the economy needs an additional monetary boost.
Bernanke repeated testimony today in the Senate that he delivered yesterday in the House, describing “positive developments” in the job market while saying it’s still “far from normal.” He said the inflationary impact of higher gasoline prices is likely to be temporary.
Job seekers in New York. Photographer: Seth Wenig/AP
Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, on Feb. 29, 2012. Photographer: Andrew Harrer/Bloomberg
The semiannual testimony to Congress is a contrast to last July, when Bernanke outlined steps that the Federal Open Market Committee took at later meetings, and to the Fed’s January gathering, when some policy makers said more bond-buying might be needed.
“There’s certainly nothing in the testimony, certainly nothing explicit, to suggest that the Fed is really actively considering additional action,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. The speech countered “a strong sense among some market participants that the Fed is ultimately going to do a third round of quantitative easing.”
The Standard & Poor’s 500 Index rose 0.4 percent today to 1,371.75 at 9:37 a.m. in New York after falling 0.5 percent yesterday as Bernanke’s remarks damped speculation of new bond purchases by the Fed. The yield on the 10-year Treasury note rose to 2.04 percent from 1.97 percent yesterday.
Economy Improving
“With the economy improving, I’m not surprised that he’s not going to go with QE right now,” said Jon Burnham, the New York-based fund manager whose $123 million Burnham Fund has beaten 99 percent of rivals over the past five years. “We go through periods when the economy just improves on its own.”
Reports yesterday and today added to evidence that the world’s largest economy is gathering strength.
The number of Americans filing first-time claims for jobless benefits fell to a level matching a four-year low, more evidence the labor market is healing. Applications for unemployment insurance decreased 2,000 in the week ended Feb. 25 to 351,000, Labor Department figures showed today.
Gross domestic product grew at a 3 percent pace in the fourth quarter, up from an initial estimate of 2.8 percent, the Commerce Department reported. The Institute for Supply Management-Chicago Inc. said its business barometer climbed to a 10-month high.
The Fed’s Beige Book regional business survey, released after Bernanke’s testimony, said the economy expanded at a “modest to moderate pace” in January and early February, fueled by manufacturers, including automakers. The survey is published two weeks before the FOMC meets to set monetary policy.
2014 Outlook
Even so, Bernanke repeated the Fed’s January statement that economic conditions are likely to warrant low interest rates at least through late 2014. That extended an earlier date of mid- 2013.
“At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives” for stable prices and maximum employment.
Bernanke, who has kept interest rates near zero since December 2008 and expanded the Fed’s balance sheet with two rounds of asset purchases totaling $2.3 trillion, came under fire from some lawmakers.
Hensarling Questions
“I question, after three years of the most highly accommodative monetary policy, I believe, in the history of our nation, the recent announcement that we will continue this policy for two more years,” said Representative Jeb Hensarling, a Texas Republican.
Bernanke, 58, acknowledged there are limits to how much the Fed can do to boost the economy.
“Monetary policy is not a panacea,” he said. “It can help offset cyclical fluctuations and financial crises like we’ve had, but the long-term health of the economy depends mostly on decisions taken by the Congress and the administration.”
Bernanke, a former Princeton University professor, said the FOMC’s announcement last month of a 2 percent inflation target was aimed at providing “additional transparency” and did “not imply a change in how the committee conducts policy.”
The Fed chairman said at times when the inflation and full employment goals are not complementary, the FOMC “follows a balanced approach in promoting them.”
Time Horizons
That approach will take into account “the magnitudes of the deviations of inflation and employment from levels judged to be consistent with the dual mandate, as well as the potentially different time horizons over which employment and inflation are projected to return to such levels,” he said.
The FOMC’s forecasts from January suggest policy makers see a higher deviation in unemployment than inflation. The panel expects inflation to be in a range of 1.4 percent to 2 percent over the next three years.
By contrast, it forecasts the unemployment rate to be in a range 6.7 percent to 7.6 percent in 2014, or as much as 1.6 percentage points above a longer-run estimate of full employment of 6 percent.
Bernanke will testify in Congress again today at 10 a.m. before the Senate Banking Committee.
“The nice thing about this is he always has a chance to refine his message on the second day,” said Eric Green, the chief economist and head of rate strategy at TD Securities in New York.
To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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