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Bernanke Sees Low Interest Rates Long After Bond Buying Ends
Perspective | 22 November 2013

Federal Reserve Chairman Ben S. Bernanke said the labour market has shown “meaningful improvement” since the start of the central bank’s bond-buying programme 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 19 November in a speech to economists in Washington. He said a “preponderance of data” would be needed to begin removing accommodation.

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 labour market, Bernanke said. While recent job reports have been “somewhat disappointing,” the unemployment rate has fallen 0.8 percentage point during the programme 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 jeopardise the more than four-year economic expansion. Central bankers have sought to convince investors that tapering the US$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 central bankers to rely more on guidance about the outlook for the main interest rate, Bernanke said.

“He’s saying that they achieved improvement in labour market conditions, but they’re still uncertain whether that progress will be sustained without all their support,” said Laura Rosner, a US economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York.

Bernanke said in response to audience questions that the central bank’s policies are helping the American middle class by supporting housing, strengthening financial markets and shoring up consumers’ balance sheets.

‘Important Factor’
“Our objectives are squarely tied to Main Street,” he said. “The economy has been growing, jobs have been coming back and the Fed has been an important factor in maintaining that momentum.”

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 US$5 trillion in market capitalisation from global stocks.

The yield on the 10-year Treasury was 2.71 percent on late 19 November 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 for the week of 11 November, declining from a two-year high in August, Freddie Mac data show.

Bernanke said in his remarks that interest rates rose too high over the summer, due in part to “a perceived reduction in the Fed’s commitment to meeting its objectives.” That increase “was neither welcome nor warranted,” Bernanke said.

First Tapering
The Federal Open Market Committee’s (FOMC) decision in September to refrain from slowing its buying surprised investors who had forecast the first tapering of the programme. The purchases have pumped up the Fed’s balance sheet to a record US$3.91 trillion.

Bernanke said that “although the FOMC’s decision came as a surprise to some market participants, it appears to have strengthened the credibility of the committee’s forward rate guidance” and said that the decline in interest rates since September is “more consistent” with that guidance.

The FOMC last month renewed its pledge to press on with bond purchases until the outlook for the labour market has “improved substantially.” The Fed probably won’t taper purchases until its 18-19 March policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey on 8 November. Unemployment last month was 7.3 percent.

Bernanke’s term as chairman ends on 31 January, and Vice Chairman Janet Yellen has been nominated to succeed him. Bernanke signalled that his views are similar to the ones she expressed in her confirmation hearing on 14 November before the Senate Banking Committee.

‘Robust Recovery’
“I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony, 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 that job-market gains would arise from stronger economic growth, which was running at a 2.8 percent rate last quarter. Fed officials forecast a 2 percent to 2.3 percent expansion for 2013, compared with a 1.7 percent estimate released by the Organization for Economic Cooperation and Development.

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