Federal Reserve Chairman Ben S Bernanke renewed a pledge to sustain record stimulus even after the US expansion gains strength, while saying policy makers don’t expect the economy to remain weak through 2015.
“We expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens,” Bernanke said today in the text of a speech in Indianapolis. Policy makers’ forecast to hold the main interest rate near zero until at least mid-2015 “doesn’t mean that we expect the economy to be weak through” that year.
The Federal Open Market Committee said last month it will buy $40 billion of mortgage debt a month in a third round of quantitative easing until the labour market shows “sustained improvement.” The panel also extended its horizon for low interest rates from a previous date of late 2014.
Bernanke, a scholar of the Great Depression, has deployed the most aggressive monetary policies since the Fed’s founding nearly a century ago as he battled the 2007-2009 financial crisis, helped pull the nation out of the worst recession since the 1930s and sought to keep the expansion going.
Five years of low interest rate policies “have not led to increased inflation,” and the public’s expectations for price gains “remain quite stable,” Bernanke said. Fed officials have the necessary tools to tighten conditions when needed to prevent “inflationary pressures down the road,” Bernanke said.
The Fed chairman said last month he wants stronger growth and improvement in the labour market, which he characterized as a “grave concern.” The US economy added 96,000 jobs in August, less than forecast by economists and down from a 141,000 increase in July. The October 5 jobs report may show employers added 115,000 jobs in September, according to the median of 80 economist estimates in a Bloomberg survey.
Prior estimate
The economy grew less than previously forecast in the second quarter, the Commerce Department said September 27. Gross domestic product expanded by 1.3 per cent in the second quarter after expanding at a two per cent rate from January through March. The revision compared with a prior estimate of 1.7 per cent.
At the same time, the Institute for Supply Management’s US factory index rose to 51.5 in September from 49.6 a month earlier, the Tempe, Arizona-based group said today. Economists in a Bloomberg survey projected a reading of 49.7 for September, according to the median of 76 forecasts. The dividing line between expansion and contraction is 50.
Third round
The Fed’s third round of quantitative easing announced September 13 has no end date or fixed total amount, unlike the first two programmes of bond buying. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.
Some Fed officials disagreed with the new asset purchases. Richmond Fed President Jeffrey Lacker, who has dissented from every FOMC decision this year, said in a September 15 statement that he opposed new easing in mortgage-backed securities because allocating credit should be the province of fiscal authorities such as the US Treasury or Congress.
Charles Plosser of Philadelphia said in a September 25 speech that more easing probably won’t boost growth or hiring and may jeopardize the Fed’s credibility. James Bullard of St Louis said in a September 27 CNBC interview that policy makers should have held off on new bond buying until they had a clearer picture of the global economy. The two regional Fed bank presidents don’t have a vote on the FOMC this year.
‘Bad’ policy
Complaints that Fed policies enable “bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow” are not persuasive, Bernanke said.
“Responsibility for fiscal policy lies squarely with the Administration and the Congress,” Bernanke said. “Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it’s worth, I think the strategy would also likely be ineffective.”
The Standard & Poor’s 500 Index tumbled the most in almost four months last week, losing 1.3 per cent to 1,440.63 on concern Europe’s debt crisis is worsening and stimulus measures may not be enough to boost economic growth. The S&P Supercomposite Homebuilding Index slid 7.3 per cent for the biggest drop since June amid worse-than-expected housing data.
The benchmark for American equities has advanced 15 per cent this year and more than doubled since reaching a 12-year low of 676.53 on March 9, 2009. Wall Street strategists surveyed by Bloomberg project that next year it will surpass its all-time high of 1,565.15 reached in October 2007.
Weak growth
Weak economic growth is forcing new and faster cost cuts at companies from Bank of America Corp. and Hewlett-Packard Co to Staples Inc and Eastman Kodak Co, dimming the outlook for the job market.
Bank of America, the second-biggest US lender, is speeding up a 2011 plan to trim $8 billion in expenses and more than 30,000 positions. Hewlett-Packard, the world’s largest personal-computer maker, will slash 29,000 jobs instead of the 27,000 it announced in May. Staples is accelerating its shutdown of 15 American stores as consumers shift to using fewer traditional office products such as folders.
