The FOMC gathered before the Labor Department’s jobs report for the month of June -- released on July 5 -- exceeded expectations. The economy added 195,000 jobs last month and the unemployment rate was unchanged at 7.6%.
Bernanke said the central bank is trying to communicate its plans for two different policy tools. With bond purchases, the Fed is “trying to achieve a substantial improvement in the outlook for the labor market in the context of price stability. We’ve made progress on that but we still have further to go,” he said.
The Fed wields another policy tool with its benchmark interest rate, which it reduced to close to zero in December 2008. Officials have said they won’t consider raising the main interest rate until the unemployment rate falls to 6.5%, as long as long-term inflation expectations don’t exceed 2.5%.
“It may well be sometime after we hit 6.5% before rates reach any significant level,” Bernanke said. “So again, the overall message is accommodation. There is some prospective, gradual and possible change in the mix of instruments, but that shouldn’t be confused with the overall thrust of policy which is highly accommodative.”
The 59-year-old Fed chief said the FOMC may opt to hold interest rates near zero even after unemployment reaches 6.5% due to the possibility of low inflation. Also, the jobless rate may understate the weakness in the labor market, he said.
“What I hear him saying is that even when we slow purchases, the balance sheet still gets bigger and even if we stop the purchases the balance sheet doesn’t shrink,” said Michael Gapen, a senior U.S. economist at Barclays Plc in New York, and a former member of the Fed’s Division of Monetary Affairs. “They are trying to communicate that tapering is not a tightening of policy. That is the fine line they are walking.”
Any decision by the Fed on the bond purchases influences how investors view its approach to the federal funds rate, Gapen said. For example, if the Fed’s outlook toward employment improves, then investors will probably shift how they view policy makers’ approach to the main interest rate.
Some 15 policy makers in June expected the first increase in the benchmark lending rate in 2015 or later. Still, fed funds futures contracts show about a 54% probability that the benchmark lending rate will be 0.5% or higher by December 2014, an increase from 22% two months ago.
Fed policy makers next meet July 30-31 in Washington. They don’t plan to update their economic forecasts, and Bernanke isn’t scheduled to hold a press conference until after their Sept. 17-18 meeting. At that gathering, the FOMC will be able to review jobs reports for July and August.
“There’s still a clear bias to taper but I think they’ve taken just a baby step back from the strength of that bias and data will matter from here,” said Julia Coronado, chief economist for North America at BNP Paribas SA in New York, and a former Fed economist. “It’s not just hiring, it’s GDP and inflation that will factor into the equation,” she said, referring to gross domestic product.