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Washington - Federal Reserve chairperson Ben Bernanke said on Wednesday the US economy is expanding strongly enough for the central bank to begin slowing the pace of its bond-buying stimulus later this year.
Bernanke's confirmation that the Fed is getting closer to pulling back on its $85bn in monthly asset purchases confirmed investor fears, sending stocks and bonds sharply lower and pushing benchmark Treasury yields to a 15-month high.
Moderate growth should lead to a further healing in the job market as headwinds facing the economy ease, Bernanke said. He also said policymakers expect inflation to move back up toward their long-term 2% goal.
The Fed's willingness to dial back on the amount of stimulus it is pumping into the economy reflects growing confidence in the sustainability and strength of the recovery. Since cutting interest rates to near zero in late 2008, the central bank has more than tripled its balance sheet to about $3.3trn to drive borrowing costs down and spur hiring.
"The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year," Bernanke said.
He added that the jobless rate should have declined to near 7% from its current rate of 7.6% by the time bond purchases are halted. If its forecasts proved too optimistic, the Fed could stop reducing its bond purchases or even raise them again, Bernanke said.
In a change of policy, Bernanke also said a majority of Fed policymakers believe the central bank should hang onto the mortgage assets it acquired through its unconventional monetary stimulus when it decides to tighten monetary policy.
He made the statements at a news conference on the Fed's decision to continue buying $40bn in mortgage-backed securities and $45bn in longer-term US government securities each month.
After a two-day meeting, the Fed's policy-setting panel offered a more upbeat assessment of the risks facing the economy than it have given after the last meeting in May. "The committee sees the downside risks to the outlook for the economy and the labour market as having diminished since the fall," it said.
A Reuters poll of 17 top Wall Street bond dealers found that 16 expect a reduction in the Fed's asset purchases by year-end, with a plurality pegging the central bank's September meeting as the starting point. These dealers saw the Fed slowing its bond purchases by $10bn to $28bn on that first pass, with a median response of $20bn.
Rate rise not seen until 2015
Bernanke stressed that a slower pace of bond buying would still be adding support to the economy, and that any decision to begin removing stimulus remained a long ways off. Any eventual increases in interest rates would also be gradual, he added.
"They do indeed plan to taper purchases later this year and hope to be done by next summer. Bernanke wants to communicate that this is not necessarily tightening, but the market may not see it that way," said Axel Merk, president and chief investment officer of Merk Investments in Palo Alto, California.
Esther George, the president of the Kansas City Fed, again dissented against the Fed's expansion of its support for the economy, expressing concern it could fuel financial imbalances and hurt the central bank's goal of keeping inflation contained. She has dissented at every policy meeting since January.
But in a surprise, the St. Louis Fed chief, James Bullard, also dissented, though in the opposite direction, arguing the Fed should have signalled more strongly its willingness to keep its stimulus in place to defend its 2% goal for inflation.
In its statement, the Fed repeated that it would not raise rates until unemployment hits 6.5% or lower, provided that the outlook for inflation stays under 2.5%.
Bernanke made clear that threshold was merely for considering a rate hike, not a trigger for necessarily making one. In fresh quarterly projections, 14 of the 19 members of the Fed's policy panel said they did not think it would be appropriate to raise rates until some time in 2015.
In a sharp downgrade, the Fed forecast the PCE price index, its preferred gauge of the price pressures facing consumers, would rise just 0.8% to 1.2% this year. However, it saw inflation heading back to 1.4% to 2.0% in 2014 and 1.6% to 2.0% in 2015.
A low inflation rate could allow the Fed to keep interest rates lower for longer and could even force additional monetary easing if low inflation persists or inflation falls further.
In a slight upgrade to their economic projections, officials forecast unemployment to average 6.5% to 6.8% in the fourth quarter of next year, and 5.8% to 6.2% in the final three months of 2015.
They forecast US economic growth of between 3.0% and 3.5% next year and 2.9% to 3.6% in 2015.
Analysts think US growth slowed a bit in the second quarter of this year in the face of fiscal drag from government spending cuts and higher taxes; recent readings from the economy have been mixed.
The labour market, a central focus of Fed efforts to boost growth, has notched steady improvement with 175 000 new jobs added in May. But US manufacturers have been hurt by softer overseas demand, and inflation has fallen even further beneath the Fed's goal.
The consumer price index was up 1.4% in May from a year ago. But the PCE price index rose just 0.7% in the 12 months through April, the most recent reading.
Bernanke's confirmation that the Fed is getting closer to pulling back on its $85bn in monthly asset purchases confirmed investor fears, sending stocks and bonds sharply lower and pushing benchmark Treasury yields to a 15-month high.
Moderate growth should lead to a further healing in the job market as headwinds facing the economy ease, Bernanke said. He also said policymakers expect inflation to move back up toward their long-term 2% goal.
The Fed's willingness to dial back on the amount of stimulus it is pumping into the economy reflects growing confidence in the sustainability and strength of the recovery. Since cutting interest rates to near zero in late 2008, the central bank has more than tripled its balance sheet to about $3.3trn to drive borrowing costs down and spur hiring.
"The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year," Bernanke said.
He added that the jobless rate should have declined to near 7% from its current rate of 7.6% by the time bond purchases are halted. If its forecasts proved too optimistic, the Fed could stop reducing its bond purchases or even raise them again, Bernanke said.
In a change of policy, Bernanke also said a majority of Fed policymakers believe the central bank should hang onto the mortgage assets it acquired through its unconventional monetary stimulus when it decides to tighten monetary policy.
He made the statements at a news conference on the Fed's decision to continue buying $40bn in mortgage-backed securities and $45bn in longer-term US government securities each month.
After a two-day meeting, the Fed's policy-setting panel offered a more upbeat assessment of the risks facing the economy than it have given after the last meeting in May. "The committee sees the downside risks to the outlook for the economy and the labour market as having diminished since the fall," it said.
A Reuters poll of 17 top Wall Street bond dealers found that 16 expect a reduction in the Fed's asset purchases by year-end, with a plurality pegging the central bank's September meeting as the starting point. These dealers saw the Fed slowing its bond purchases by $10bn to $28bn on that first pass, with a median response of $20bn.
Rate rise not seen until 2015
Bernanke stressed that a slower pace of bond buying would still be adding support to the economy, and that any decision to begin removing stimulus remained a long ways off. Any eventual increases in interest rates would also be gradual, he added.
"They do indeed plan to taper purchases later this year and hope to be done by next summer. Bernanke wants to communicate that this is not necessarily tightening, but the market may not see it that way," said Axel Merk, president and chief investment officer of Merk Investments in Palo Alto, California.
Esther George, the president of the Kansas City Fed, again dissented against the Fed's expansion of its support for the economy, expressing concern it could fuel financial imbalances and hurt the central bank's goal of keeping inflation contained. She has dissented at every policy meeting since January.
But in a surprise, the St. Louis Fed chief, James Bullard, also dissented, though in the opposite direction, arguing the Fed should have signalled more strongly its willingness to keep its stimulus in place to defend its 2% goal for inflation.
In its statement, the Fed repeated that it would not raise rates until unemployment hits 6.5% or lower, provided that the outlook for inflation stays under 2.5%.
Bernanke made clear that threshold was merely for considering a rate hike, not a trigger for necessarily making one. In fresh quarterly projections, 14 of the 19 members of the Fed's policy panel said they did not think it would be appropriate to raise rates until some time in 2015.
In a sharp downgrade, the Fed forecast the PCE price index, its preferred gauge of the price pressures facing consumers, would rise just 0.8% to 1.2% this year. However, it saw inflation heading back to 1.4% to 2.0% in 2014 and 1.6% to 2.0% in 2015.
A low inflation rate could allow the Fed to keep interest rates lower for longer and could even force additional monetary easing if low inflation persists or inflation falls further.
In a slight upgrade to their economic projections, officials forecast unemployment to average 6.5% to 6.8% in the fourth quarter of next year, and 5.8% to 6.2% in the final three months of 2015.
They forecast US economic growth of between 3.0% and 3.5% next year and 2.9% to 3.6% in 2015.
Analysts think US growth slowed a bit in the second quarter of this year in the face of fiscal drag from government spending cuts and higher taxes; recent readings from the economy have been mixed.
The labour market, a central focus of Fed efforts to boost growth, has notched steady improvement with 175 000 new jobs added in May. But US manufacturers have been hurt by softer overseas demand, and inflation has fallen even further beneath the Fed's goal.
The consumer price index was up 1.4% in May from a year ago. But the PCE price index rose just 0.7% in the 12 months through April, the most recent reading.
