Bernanke says Fed to keep rates low even after growth pickup

Third Round

The Fed’s third round of quantitative easing announced Sept. 13 has no end date or fixed total amount, unlike the first two programs of bond buying. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

Some Fed officials disagreed with the new asset purchases. Richmond Fed President Jeffrey Lacker, who has dissented from every FOMC decision this year, said in a Sept. 15 statement that he opposed new easing in mortgage-backed securities because allocating credit should be the province of fiscal authorities such as the U.S. Treasury or Congress.

Charles Plosser of Philadelphia said in a Sept. 25 speech that more easing probably won’t boost growth or hiring and may jeopardize the Fed’s credibility. James Bullard of St. Louis said in a Sept. 27 CNBC interview that policy makers should have held off on new bond buying until they had a clearer picture of the global economy. The two regional Fed bank presidents don’t have a vote on the FOMC this year.

‘Bad’ Policy

Complaints that Fed policies enable “bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow” are not persuasive, Bernanke said.

“Responsibility for fiscal policy lies squarely with the Administration and the Congress,” Bernanke said. “Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it’s worth, I think the strategy would also likely be ineffective.”

The Standard & Poor’s 500 Index maintained gains after Bernanke’s comments, adding 0.6 percent to 1,449.13 at 12:54 p.m. The yield on the 10-year Treasury note fell 0.01 percentage point to 1.62 percent.

The benchmark for American equities tumbled the most in almost four months last week, losing 1.3 percent to 1,440.63 on concern Europe’s debt crisis is worsening and stimulus measures may not be enough to boost economic growth. The S&P Supercomposite Homebuilding Index slid 7.3 percent for the biggest drop since June amid worse-than-expected housing data.

Record High

The benchmark for American equities has advanced 15 percent this year and more than doubled since reaching a 12-year low of 676.53 on March 9, 2009. Wall Street strategists surveyed by Bloomberg project that next year it will surpass its record high of 1,565.15 reached in October 2007.

Weak economic growth is forcing new and faster cost cuts at companies from Bank of America Corp. and Hewlett-Packard Co. to Staples Inc. and Eastman Kodak Co., dimming the outlook for the job market.

Bank of America, the second-biggest U.S. lender, is speeding up a 2011 plan to trim $8 billion in expenses and more than 30,000 positions. Hewlett-Packard, the world’s largest personal-computer maker, will slash 29,000 jobs instead of the 27,000 it announced in May. Staples is accelerating its shutdown of 15 American stores as consumers shift to using fewer traditional office products such as folders.

Bloomberg News

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