For investors nervous about a possible decision by the Federal Reserve to cut back on the jet fuel being supplied to the economy, the man in charge has a message:
Chairman Ben Bernanke is telling Congress that the central bank remains highly dependent on economic developments as it decides how to adjust asset purchases known as QE3 (the third round of quantitative easing).
The markets have been whipsawed in recent months amid concerns that the Fed might pull back abruptly on the $85 billion in monthly asset purchases. That possibility was raised in his testimony in mid-May. Later, at the end of the Federal Open Market Committee's June meeting, Bernanke explained at a news conference that it was possible asset purchases could begin to be trimmed this year. Consequently, stocks sold off and several Fed officials followed with speeches, which seemed aimed at damage control.
What Ben's saying
In prepared remarks for the House Financial Services Committee, Bernanke emphasizes that, "because our asset purchases depend on economic and financial developments, they are by no means on a preset course."
He says if the pace of economic growth were to pick up and if inflation were to rise back toward the Fed's target, "the pace of asset purchases could be reduced somewhat more quickly." If a severe slowdown were seen, Bernanke says, "the committee would be prepared to employ all of its tools, including an increase (in) the pace of purchases for a time, to promote a return to maximum employment in a context of price stability."
The bottom line here seems to be that the Fed still believes it could begin to cut back on so-called quantitative easing later this year, but growth seems to remain steady and the job market must continue to heal.
Regarding status quo, Bernanke tells the committee that "the economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy." He notes that the unemployment rate stood at 7.6 percent in June, "about a half percentage point lower than in the months before the Federal Open Market Committee initiated its current asset purchase program in September."
Still, he says "the jobs situation is 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."
Next Fed meeting
The next two-day meeting of the Fed begins July 30. At that meeting, the Fed is scheduled to issue its usual written statement, but Bernanke isn't scheduled to hold a news conference until the following meeting, in September.
On a glide path toward exit
All signs point toward Bernanke departing the chairman's post as scheduled at the end of his term in January. While Vice Chair Janet Yellen has widely been seen as his successor, a number of reports have surfaced recently seeming to tout former Treasury Secretary Larry Summers as a possible nominee. The decision is up to President Barack Obama. Any nomination would be sent to the Senate for confirmation.
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