Bernanke signals Fed target rate to stay low after QE

Federal Reserve Chairman Ben S. Bernanke said the Fed will probably hold down its target interest rate long after ending $85 billion in monthly bond buying, and possibly after unemployment falls below 6.5%.

“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches the Fed’s 6.5% threshold, Bernanke said yesterday in a speech to economists in Washington. A “preponderance of data” will be needed to begin removing accommodation, he said.

In deciding when to wind down open-ended purchases of bonds, Fed officials are weighing both the “cumulative progress” since they began the program in September 2012 as well as “the prospect for continued gains,” Bernanke said. The labor market has shown “meaningful improvement” since the start of the program.

Policy makers are debating how to slow the pace of asset purchases without causing a surge in interest rates that could jeopardize the more than four-year economic expansion. Central bankers have sought to convince investors that tapering bond purchases wouldn’t signal that an increase in the benchmark interest rate is any closer.

In response to audience questions, Bernanke said markets are doing a better job “differentiating” between the Fed’s plans to hold interest rates low even after it begins to slow bond purchases.

‘Progressed Sufficiently’

When the Fed does slow asset purchases, “it will likely be because the economy has progressed sufficiently” for central bankers to rely more on guidance about the outlook for the main interest rate, Bernanke said in his speech.

“He’s saying that they achieved improvement in labor market conditions, but they’re still uncertain whether that progress will be sustained without all their support,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York.

Bernanke said that the central bank’s policies are helping the American middle class by supporting housing, strengthening financial markets and shoring up consumers’ balance sheets.

“Our objectives are squarely tied to Main Street,” he said in response to questions at the dinner event for the National Economists Club. “The economy has been growing, jobs have been coming back and the Fed has been an important factor in maintaining that momentum.”

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