Ben Bernanke calms markets, eases fears of early Fed taper

Federal Reserve Board Chairman Ben Bernanke spoke at an economic conference near Boston Wednesday, saying the Fed will continue to pour stimulus into the US economy — at least until unemployment and inflation improve.

  • close
    Federal Reserve Board Chairman Ben Bernanke speaks at a conference of the National Bureau of Economic Research on July 10, 2013, in Cambridge, Mass. Reassuring investors that the Fed would continue supporting the US economy for the "foreseeable future," Bernanke said he is "somewhat optimistic" about the economy.
    View Caption
  • About video ads
    View Caption

After rattling markets last month by hinting the Fed might roll back stimulus earlier than expected, Federal Reserve Chairman Ben Bernanke quieted anxieties, saying the US economy needs to be bolstered by a "highly accommodative monetary policy for the foreseeable future."

Mr. Bernanke's remarks came hours after the Fed released minutes of a June meeting where half of attendees supported halting asset purchases by the end of the year. The Fed is buying an unprecedented $85 billion in Treasury bonds and securities every month to coax economic growth, and fears that the Fed will scale back these purchases as early as September have spooked financial markets both domestically and abroad.

But speaking at a National Bureau of Economic Research conference in Cambridge, Mass., Bernanke seemed to allay investors' concerns about early tapering. Unemployment is too high and inflation is too low to do away with easy-money policies just yet, he said. 

Recommended: Five signs Americans are forgetting recession's lessons

Investors sighed in relief. Global markets soared, gold prices rose, and the US dollar tumbled to its lowest index .DXY since June 25. The Dow and the S&P 500 hit record highs by midday Thursday – the Dow surged 160 points to 15,452 and the S&P 500 soared 8 points to 1,671, 1 percent past its previous all-time closing high of 1,669.

Bernanke, however, did not altogether dismiss the possibility of dialing back asset purchases. He was careful to make the distinction between the Fed's "overall accommodation" of the economy and how the Fed uses two instruments (asset purchases and interest rate policies) to support the economy.

"There is some prospective, gradual and possible change in the mix of instruments [we may use]," Bernanke said.

Overall, Bernanke said the Fed's outlook of the economy is a mixed bag — "somewhat optimistic," but warily eyeing "significant risks."

The housing sector, a "force of major drag on the economy for many years," has become a bright spot over the past year. Automobile sales are up. And American households are reporting less debt burden, more wealth, and more optimism about the state of the economy today than in several years.

Signs of growth, however, do not mean the Fed will allow interest rates to rise yet. Bernanke said interest rates will remain where they are, at the very least until unemployment falls from its present 7.6 percent to 6.5 percent.

"As I've said before, that 6.5 percent is a threshold — not a trigger. There will not be an automatic increase [in interest rates]. Instead, that will be a time to think about the situation anew. And given, as I said, the weakness of the labor market, the fact that unemployment probably understates the economy, and given where inflation is, I think it'll be some time well after we reach 6.5 percent before rates move to a significant level," Bernanke said.

Such economic indicators suggest that it is "still too early to say we've weathered the fiscal restraint," Bernanke said.

The economy is battling "very strong fiscal headwinds" that may be still exacerbated by the effects of federal budget cuts known as "the sequester." Inflation rates — which some Fed policymakers said were at a 53-year low last month — are also weak. Although that may give households more purchasing power, very low inflation raises the real cost of investing and the risk of economic stagnation; if inflation rates do not pick up to about 2 percent, the Fed has "good reason to remain accommodative" into the future, Bernanke said.

Bernanke also cautioned against casting too much optimism on recent jobs numbers. Investors hailed June's jobs report, which was "better than expected," but if anything, the unemployment rate of 7.6 percent "overstates" the health of the economic markets, he said. 

The weakness of the labor market, low inflation, and the potential for sequestration cuts to end up dampening growth show that the economy is far from being robust, Bernanke said.

About these ads
Sponsored Content by LockerDome
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.




Save for later


Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items


Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items


Failed to save

You have already saved this item.

View Saved Items