Bernanke: Congress itself poses the greatest risk to growth

Binyamin Applebaum @ NYTs:

WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, emphasized on Wednesday that the central bank remains committed to bolstering the economy, insisting that any deceleration in the Fed’s stimulus campaign will happen because it is achieving its goals, not because it has lowered its sights. 

Mr. Bernanke said he still expected to reach that point in the coming months but, in what may have been his final appearance before the House Financial Services Committee, he cautioned that Congress itself posed the greatest risk to growth. 

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he told the committee. 

The sluggish economy has been a constant background for Mr. Bernanke’s biannual testimony. Unemployment, at 7.6 percent, remains stubbornly above the Fed’s goals. 

Inflation has sagged to the lowest pace on record. Growth continues at a “modest to moderate pace,” the Fed said Wednesday in its monthly beige book survey of economic conditions across the country, released separately from Mr. Bernanke’s testimony.

Mr. Bernanke’s message on Wednesday was that the Fed would cut back on its monthly asset purchases — $85 billion of mortgage-backed securities and Treasury securities — only if conditions were improving. If unemployment instead stays high and growth rates do not improve, the Fed will keep buying bonds. If inflation stays low, the Fed will keep buying bonds. If longer- term interest rates go up, the Fed will keep buying bonds. 

Mr. Bernanke revived a talking point from earlier this year, insisting the Fed was willing to buy more than $85 billion a month. “Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Mr. Bernanke told the committee. 

Even as Mr. Bernanke said that the Fed would keep its options open, he continued to suggest that the Fed would like to start reducing its asset purchases this year and then end them as soon as possible. If the economy needs more stimulus, the Fed would prefer to extend its policy of holding short-term interest rates near zero. Mr. Bernanke, who refers to this shift as “a change in the mix of tools,” has not explained the rationale and was not asked to do so. 

The Fed’s course will not be determined by Mr. Bernanke much longer. He is widely expected to step down as Fed chairman at the end of his second term in January. Members of both parties took the opportunity to praise him, although Republicans generally added that they opposed the Fed’s recent efforts. No one paid much attention to the finger Mr. Bernanke had pointed at them. 

“You acted boldly and decisively and creatively — very creatively, I might add,” said the committee’s chairman, Jeb Hensarling, Republican from Texas. 

“You’ve had a lot of compliments today. In my business it’s called a eulogy,” said Emanuel Cleaver, a Missouri Democrat, who is an ordained minister. 

“You have never been boring,” said Carolyn Maloney, a New York Democrat. 

Mr. Bernanke then did his best to be boring, sending the message to markets roiled by his comments last month that it was much ado about nothing. 

Markets purred. The yield on the benchmark 10-year Treasury bond sank slightly, falling below 2.5 percent, while stock markets posted modest gains. 

The announcement last month that the Fed expected to reduce its asset purchases later this year drove up interest rates on mortgages and other loans. Some investors concluded that the Fed was curtailing its ambitions for the recovery, while others saw evidence that the Fed was overly optimistic in its forecasts. 

Mr. Bernanke described that response as “unwelcome,” but he said it had probably reduced some “excessively risky or leveraged positions” — easing concerns among some Fed officials that its efforts are pumping up new bubbles. 

He added that initial confusion about the Fed’s plans appeared to have been replaced by a new equilibrium of slightly higher interest rates. “I think the markets are beginning to understand our message,” Mr. Bernanke said. 

And he downplayed concerns that the recent rate increases had undermined economic activity. “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates,” he said. 

Analysts said that the strongest new signal Mr. Bernanke delivered in recent weeks concerned the sluggish pace of inflation. Prices rose just 1 percent during the 12 months ending in May, well below the 2 percent pace that the Fed considers healthy. Fed officials insisted for much of the year that inflation would rebound from the lowest pace on record. In recent weeks, the Fed has emphasized that it will take action if inflation does not. On Wednesday, Mr. Bernanke put inflation alongside unemployment as the justification for the Fed’s continuing efforts. 

“Our intention is to keep monetary policy highly accommodative for the foreseeable future, and the reason that’s necessary is because inflation is below our target and unemployment is still quite high,” Mr. Bernanke told the committee. 

Michael Feroli, chief United States economist at JPMorgan Chase, noted that Mr. Bernanke also cited the risk of deflation, something he had not done for several years. “The mention of deflation risks, rather than just low inflation, is a fairly strong statement coming from a sitting central bank chief,” Mr. Feroli wrote. 

Mr. Bernanke also emphasized that the Fed would not be satisfied with a decline in the unemployment rate if it was driven by people giving up the search for work rather than people finding new jobs. Importantly, he described this as a reason the Fed might extend its policy of low interest rates but not asset purchases. 

The Fed has said that it plans to hold short-term rates near zero at least as long as the unemployment rate remains above 6.5 percent, but Mr. Bernanke has made clear in recent weeks that the Fed is likely to maintain the policy well beyond that threshold so long as inflation remains under control. He said on Wednesday that he believed that the unemployment rate could be cut to around 5.6 percent without causing prices to rise outside the Fed’s preferred range. 

His likely departure, however, means that his credibility increasingly depends on convincing investors that the rest of the Fed’s policy-making committee shares his views and is committed to maintaining the same policies. That task has been complicated by the fragmentation of the committee’s views about asset purchases. About half of the 19 officials who participate in meetings of the Fed’s policy-making committee indicated before the committee’s most recent meeting last month that they expected asset purchases to end later this year, while the rest — including Mr. Bernanke — saw a need for purchases into 2014. 

Mr. Bernanke said Wednesday that his preferred timetable enjoyed “good support” from the committee, but it has not been codified in a policy statement.