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Fed chairman Ben Bernanke: stimulus programme not creating 'bubbles' Fed chairman Ben Bernanke: stimulus programme not creating 'bubbles'
(about 4 hours later)
The chairman of the Federal Reserve, Ben Bernanke, denied on Wednesday that his $85bn-a-month stimulus programme was creating new financial bubbles, as he updated Congress on his views on the US economic recovery. Federal Reserve chairman Ben Bernanke denied his $85bn-a-month stimulus programme was creating new financial bubbles as he updated Congress on his views on the US economic recovery on Wednesday.
The Fed's quantitative easing programme has driven US stock markets to record highs, even as the wider economy continues to suffer from high levels of unemployment. Questioned about whether the stimulus programme was creating bubbles similar to the one experienced by the housing market before the recession, Bernanke said "major asset classes, including the stock markets, were "not inconsistent with the fundamentals". The Federal Reserve's quantitative easing programme has helped drive US stock markets to record highs even as the wider economy continues to suffer from high levels of unemployment. Asked whether the stimulus programme was creating bubbles similar to the one experienced by the housing market ahead of the recession, Bernanke said "major asset classes, including the stock markets, were "not inconsistent with the fundamentals".
US stock markets continued to rally on Wednesday as Bernanke made clear that he has no intention of cutting short the quantitative easing programme in the near future. The US economy is improving but "headwinds", including government budget cuts, are dragging on the recovery, Bernanke said. US stock markets rallied Wednesday morning as the Fed chairman made clear he had no intention of cutting short the quantitative easing programme in the near future. The US economy is improving, but "headwinds" including government budget cuts are dragging on the recovery, Bernanke told Congress.
Bernanke warned again that Washington's deep spending cuts were holding back the recovery. "Conditions in the job market have shown some improvement recently," he said. "Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work." Investors, however, became more cautious on Wednesday afternoon and the markets fell after the release of the minutes from the Fed's last meeting showed some committee members were prepared to start cutting back the size of the programme as early as June if the recovery continues.
Bernanke acknowledging that historically low interest rates and the Fed's huge government bond-buying programme had costs but said "a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery". Bernanke warned Washington's deep spending cuts were holding back the recovery. "Conditions in the job market have shown some improvement recently," he said. "Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work."
Republican congressman Kevin Brady, from Texas, questioned Bernanke about his exit strategy from quantitative easing. "My worry is the Fed doesn't have the prescription for what ails our economy," he said. Bernanke acknowledging that historically low interest rates and the Fed's huge government bond buying programme had costs but he said "a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery."
Bernanke acknowledged the recovery had been slow but said it had faced "significant headwinds", including deep government spending cuts. He said it was "not responsible to focus all of the restraint on the very near term" and urged Congress to replace some of its fiscal tightening with measures to restrain long-term healthcare and social security costs. Republican congressman Kevin Brady questioned Bernanke about his exit strategy from quantitative easing. "My worry is the Fed doesn't have the prescription for what ails our economy," he said.
Senator Pat Toomey, from Pennsylvania, said he was concerned about recent spikes in the housing market, farm land prices and junk bonds. "I don't disagree that this is not easy," said Bernanke. "There is no risk-free strategy here." Bernanke acknowledged the recovery had been slow but said it had faced "significant headwinds" including deep government spending cuts. He said it was "not responsible to focus all of the restraint on the very near term" and urged Congress to replace some of its fiscal tightening with measures to restrain long-term healthcare and social security costs.
Bernanke said he was particularly concerned about the recession's continuing impact on the long-term unemployed. In April, there were 4.4 million long-term unemployed people in the US – those jobless for 27 weeks or more – according to the Labor Department. Their share of the unemployed declined by 2.2% to 37.4%. The levels remained a "significant concern", said Bernanke. "We are seeing evidence that employers are reluctant to look at people if they have been out of work for a long time," he said. But he said he believed it was not an "irreversible problem". The Fed chairman was asked whether monetary policy might create new bubbles. Senator Pat Toomey said he was concerned about recent spikes in the housing market, farm land prices and junk bonds. "I don't disagree that this is not easy," said Bernanke. "There is no risk free strategy here."
Speculation has been rising that the Fed might be preparing to taper off its bond purchases; some Fed members have called for the policy to be reassessed. Bernanke said the Fed would consider to monitor the situation and would taper off the programme "as the economic outlook improves". But he said a wind-down would not be an "automatic, mechanistic process". Bernanke said he was particularly concerned about the recession's continuing impact on the long-term unemployed. In April, there were 4.4m long-term unemployed people in the US – those jobless for 27 weeks or more – according to the Labor Department. Their share of the unemployed declined by 2.2 percentage points to 37.4%.
Paul Ashworth, chief US economist at Capital Economics, said: "All things considered, we still think that the Fed will begin to curb its asset purchases before the end of the year, with a complete halt sometime in the first half of next year." The levels remained a "significant concern", said Bernanke. "We are seeing evidence that employers are reluctant to look at people if they have been out of work for a long time," he said. But he said he believed it was not an "irreversible problem".
US stock markets surged on after Bernanke's remarks, with all the major markets rising in morning trading. Speculation has been rising that the Fed might be preparing to taper off its bond purchases and some Fed members have called for the policy to be reassessed.
Bernanke said the Fed would consider to monitor the situation and would taper off the programme "as the economic outlook improves". But he said a wind-down would not be an "automatic, mechanistic process".
"All things considered, we still think that the Fed will begin to curb its asset purchases before the end of the year, with a complete halt sometime in the first half of next year," said Paul Ashworth, chief US economist at Capital Economics.