Bernanke says Fed’s bond purchases aren’t on ‘preset course’

Federal Reserve Chairman Ben Bernanke (Source: Bloomberg) Federal Reserve Chairman Ben Bernanke (Source: Bloomberg)

Federal Reserve Chairman Ben S. Bernanke said the central bank’s asset purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant.

“The current pace of purchases could be maintained for longer” if inflation remained too low, the outlook for employment became less favorable or “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” Bernanke said today to the House Financial Services Committee.

If the economy improved faster than expected, and inflation rose back “decisively” toward the central bank’s 2% target, “the pace of asset purchases could be reduced somewhat more quickly,” the 59-year-old Fed Chairman said in prepared testimony. The Fed would also be prepared to increase the pace of purchases “for a time, to promote a return to maximum employment in a context of price stability.”

The Fed chairman’s remarks highlight the Federal Open Market Committee’s desire to assure that the economy and labor markets have sufficient momentum before reducing its $85 billion in monthly bond purchases. Treasury yields have jumped since June 19, when Bernanke outlined a possible timetable for tapering purchases.

Baseline Tapering’

“Clearly what happened in the markets after June was well beyond what they intended, and they’re trying to pull it back,” said Julia Coronado, chief economist for North America at BNP Paribas SA in New York and a former Fed board staff economist. “He has chosen to emphasize the conditionality of the baseline tapering forecast on data -- and not just employment data but growth, inflation and importantly, financial conditions.”

Treasuries and stocks rose after the testimony was released. The yield on the 10-year Treasury note fell to 2.47% at 9:59 a.m. in New York from 2.55% before the testimony. The Standard & Poor’s 500 Index rose 0.3% to 1,680.42.

The 10-year yield rose as high as 2.74% this month from 1.93% on May 21, the day before Bernanke said the FOMC may trim its bond buying in its “next few meetings” if officials see signs of sustained improvement in the labor market.

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