Bernanke says premature Fed tightening would endanger recovery

Inflation Expectations

The personal consumption expenditures price index rose 1% for the year ending March, below the central bank’s 2% goal. At the same time, “measures of longer-term inflation expectations have remained stable and continue to run in the narrow ranges seen over the past several years,” Bernanke said.

Bernanke’s strategy, combined with expectations of faster growth in coming years, has helped support a 17% rise in the Standard and Poor’s 500 Index this year.

Returns on riskier assets have become more attractive with U.S. 10-year notes yielding as little as 1.63% May 2. The 10-year note yielded 1.93% yesterday. An index of high- risk, high-yield junk bonds tracked by Bank of America has a total return of 5.4% this year versus minus 0.3% for an index of Treasury and agency securities.

Financial Imbalances

The Fed chairman said the central bank is on the watch for financial imbalances that may result from its low interest-rate policy. He also said another cost of the policy is that savers are receiving low returns.

“Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates,” the Fed chairman said. “Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions.”

“In considering whether a recalibration of the pace of its purchases is warranted, the committee will continue to assess the degree of progress made toward its objectives in light of incoming information,” Bernanke said, referring to the Federal Open Market Committee, the Fed panel that sets monetary policy.

Rising stock prices, consumer confidence, and housing values may be creating a foundation for self-sustaining growth this year. U.S. gross domestic product expanded at a 2.5% annual rate in the first quarter, helped by gains in consumer spending, after increasing at a rate of just 0.4% in the prior quarter.

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