Tuesday, 19 November 2013

Bernanke Sees Low Interest Rates Long After Bond Buying Ends

By Jeff Kearns & Joshua Zumbrun - Nov 19, 2013 3:50 PM PT

Federal Reserve Chairman Ben S. Bernanke said the labor market has shown “meaningful improvement” since the start of the central bank’s bond-buying program and that the benchmark interest rate will probably stay low long after the purchases end.
“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate falls below the Fed’s 6.5 percent threshold, Bernanke said today in remarks prepared for a speech to economists in Washington. He said a “preponderance of data” would be needed to begin removing accommodation.
Fed Chairman Ben S. Bernanke Ben S. Bernanke, chairman of the U.S. Federal Reserve, said “I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery.” Photographer: Pete Marovich/Bloomberg
Fed officials will weigh both the “cumulative progress” since they began the third round of bond buying in September 2012 as well as “the prospect for continued gains” as they evaluate the outlook for the labor market, Bernanke said. While recent job reports have been “somewhat disappointing,” the jobless rate has fallen 0.8 percentage point during the program and about 2.6 million payroll jobs have been added, he said.
Policy makers are debating how to slow the pace of asset purchases without causing a surge in interest rates that could jeopardize the more than four-year economic expansion. Central bankers have sought to convince investors that tapering the $85 billion monthly pace of bond purchases wouldn’t signal that an increase in the benchmark interest rate is any closer.

‘Progressed Sufficiently’

When the Fed does slow asset purchases, “it will likely be because the economy has progressed sufficiently” for policy makers to rely more on their rate policies, Bernanke said.
Bernanke’s testimony to Congress in May that the Fed “could take a step down” in its bond purchases helped push Treasury 10-year yields and 30-year mortgage rates to two-year highs and wiped out more than $5 trillion in market capitalization from global stocks.
The yield on the 10-year Treasury was 2.71 percent at 5 p.m. in New York, down from a two-year high of 3 percent in September. The average rate for a 30-year mortgage was 4.35 percent last week, declining from a two-year high in August, Freddie Mac data show.
The Federal Open Market Committee last month renewed its pledge to press on with bond purchases until the outlook for the labor market has “improved substantially.” The Fed probably won’t taper purchases until its March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8. Unemployment last month was 7.3 percent.

Term Ends

Bernanke’s term as chairman ends on Jan. 31, and Fed Vice Chairman Janet Yellen has been nominated to succeed him. Bernanke signaled that his views are similar to the ones she expressed in her confirmation hearing on Nov. 14 before the Senate Banking Committee.
“I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery,” he said.
Yellen told lawmakers last week that job-market gains would arise from stronger economic growth, which was running at a 2.8 percent year-over-year rate last quarter. Fed officials forecast a 2 percent to 2.3 percent expansion for 2013, compared with a 1.7 percent estimate released today by the Organization for Economic Cooperation and Development.
To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net