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Bernanke: What he didn’t say

By Mark Hamrick · Bankrate.com
Wednesday, May 22, 2013
Posted: 12 pm ET

Investors, savers and consumers who eagerly await a sign the Federal Reserve might soon taper asset purchases got no such indication during Chairman Ben Bernanke's congressional testimony Wednesday. Even more unlikely in the near term would be interest rate increases.

Speaking to the Joint Economic Committee of Congress, Bernanke acknowledged that growth has been moderate this year and the unemployment rate has declined to 7.5 percent. Even so, Bernanke said the job market remains weak overall, drawing attention to long-term unemployment rates that he called "historically high." He also underscored the problem of Americans giving up the search for work where "labor force participation has continued to move down."

What about those asset purchases?

While the Fed has kept short-term interest rates at record low levels, it has continued $85 billion a month in asset purchases. This has grown the central bank's asset sheet to more than $3 trillion. A huge level of so-called quantitative easing has led to fears of unintended consequences, including inflation and asset bubbles. So far, consumer and wholesale inflation measures have remained quite low.

No pledge on asset purchases

What was unsaid by Bernanke might be more notable than what he actually expressed outright. In his testimony, Bernanke cautioned that "a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further." On a question about possible asset bubbles, Bernanke said an abrupt change in policy could lead to a large correction in the stock market.

This seems to indicate the central bank still worries about a potential slowdown or stagnation. Economist Bob Brusca says, "The Fed is still worried about taking its foot off the accelerator too soon, not how to take it off the accelerator."

Can you help me here?

Also noticeably absent from the exchanges was previous tension regarding Congress's inability to come to terms on budget issues. Bernanke did cite the previously mentioned concern that "fiscal policy at the federal level has become significantly more restrictive." As if to indirectly engage lawmakers, Bernanke noted predictions that this year's deficit reduction efforts will pare 1.5 percentage points from growth and that "monetary policy does not have the capacity to fully offset an economic headwind of this magnitude."

Under questioning

Questioned by Joint Economic Committee Chairman Kevin Brady, R-Texas, Bernanke was unwilling to get more specific on the timing or even a commitment to an asset purchase asset strategy. Bernanke said an exit strategy is being discussed, but warned that the Fed first needs to see "real and sustainable labor market progress." Even so, he said policymakers could decide yet to raise or lower asset purchases. Officials have repeatedly indicated they would expect to scale back first, rather than end the purchases outright. He hinted the process could begin in "the next few meetings."


A variety of other Fed officials have been addressing the question of future asset purchases. William Dudley, president of the Federal Reserve Bank of New York, seemed to echo the tone of the Bernanke comments in an interview with Bloomberg Television. Dudley was quoted as saying Fed officials could have a better idea whether the economy can overcome effects of "the fiscal drag," in "three or four months."

Raising rates would be the next step

There's been no indication the Fed is ready to raise short-term rates. Bernanke repeated for lawmakers that the target for the federal funds rate, set at zero to a quarter percent, will be appropriate "at least as long as the unemployment rate remains above 6.5 percent." Bernanke noted that the Federal Open Market Committee is aware the risks of low rates include providing savers with "very low returns." Also as he has said before, the Fed is watching for signs that investors are taking excessive risks because rates are so low.

How much longer will you be with us?

Bernanke's term as Chairman ends in January 2014. Asked whether he would accept another term if requested by President Barack Obama, Bernanke said "I'm not prepared to answer that question." He has refused reporters' similar questions in the past about whether he might continue the job into the following years.

Next Fed meetings

The next meeting for Fed policymakers is slated for June 18 and 19. This meeting will be followed by a Bernanke news conference. There are four scheduled meetings after that for the balance of the year.

This just in

Newly released minutes from the previous policy-setting session ending May 1 provide a little more color on how the FOMC members viewed the asset purchases question.

"Many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate," the minutes say.

As for actually pulling back? The minutes say "a number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting," but it is far from clear the economic story would support what they'd require to do that.

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Carol Camp
June 10, 2013 at 4:20 pm

We sold the house, signed a construction contract May 5th... Now the rates!!! Scared to death, they've jumped from low 3's to low 4's. Thinking about losing the earnest money and finding a cheaper home!