Bernanke says premature Fed tightening would endanger recovery

Bright Spots

“Compared to two years ago, three years ago, there are bright spots in this economy in housing, energy and automotive that would say this tepid recovery is moving into a phase where it can stand on its two legs,” Michael Jackson, chairman and chief executive of AutoNation Inc. told investors on an earnings call April 18.

Fed officials said in their statement May 1 that the Federal Open Market Committee “is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

Since then, some regional Fed bank presidents have indicated that they may be inclined to pare back the purchases if economic data continues to show the expansion gaining strength, while others said continued stimulus is necessary.

Shrinking Purchases

Philadelphia Fed President Charles Plosser last week called for shrinking purchases at the Fed’s next meeting; San Francisco’s John Williams said the central bank “could reduce somewhat” the pace of purchases as early as this summer “if all goes as hoped,” and Boston’s Eric Rosengren said low inflation and high unemployment suggest there may be a need for more stimulus, not less.

Charles Evans of Chicago said May 20 that he’d like to see monthly employment growth of 200,000 or more for at least six months before judging the labor market substantially improved. Payrolls have increased an average 208,000 a month over the last six monthly reports through April.

“If I had high confidence that this was going to be maintained over the next six months and beyond, I would be quite amenable to discussions about adjusting the flow of purchases downward,” Evans told reporters after his speech. “I’d like to see a few more months of data.”

Fed officials have left the benchmark lending rate near zero since December 2008 and have expanded the balance sheet to $3.35 trillion compared with $879 billion on May 9, 2007, with quantitative easing.

Bloomberg News

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