Bernanke today said the Fed’s balance sheet would remain elevated after purchases of mortgage bonds and Treasuries end.
The Fed “will be holding its stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities,” he said. The strategy “will continue to put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.”
Policy makers, including Bernanke, have tried to assure investors that the Fed will hold down the benchmark interest rate after ending bond buying. Bernanke, in an appearance in Cambridge, Massachusetts on July 11, said “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” a message he repeated today.
Even so, the average 30-year fixed rate mortgage has risen to 4.51% as of July 11 from 3.51% two months ago, according to Freddie Mac.
The FOMC said in a June 19 statement that keeping the federal funds rate between zero and 0.25% “will be appropriate at least as long” as unemployment remains above 6.5% and the forecast for inflation in one to two years doesn’t exceed 2.5%. The chairman again took pains today to explain that the Fed will look beyond the unemployment rate to assure that labor markets are improving before deciding on interest rates.
“For example, if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the committee would be unlikely to view a decline in unemployment to 6.5% as a sufficient reason to raise its target for the federal funds rate,” he said. Increases in the benchmark lending rate “are likely to be gradual” when they happen, he said.
Bernanke, seeking to help unemployed Americans find work, has orchestrated the most aggressive easing in the central bank’s 100-year history, expanding its balance sheet to $3.5 trillion from $869 billion since August 2007. He said last month the FOMC may begin tapering bond purchases “later this year” and halt the program around mid-2014 if the economy performs in line with the Fed’s forecasts.
In today’s testimony, the Fed chairman described labor markets as “far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high.”
While risks to the economy have diminished since late last year, Bernanke said, “the risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery.”
The slow pace of the recovery means that it remains “vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”