Bernanke says Fed to maintain stimulus efforts

Wednesday 22 May 2013 16.54
Ben Bernanke says higher taxes and deep spending cuts are expected to slow US economic growth this year
Ben Bernanke says higher taxes and deep spending cuts are expected to slow US economic growth this year

US Federal Reserve chairman Ben Bernanke has told Congress that the US job market remains weak and that it is too soon for the Fed to end its extraordinary stimulus programmes.

Reducing the Fed's efforts to keep borrowing rates low would "carry a substantial risk of slowing or ending the economic recovery," Bernanke said in testimony to the Joint Economic Committee.

The Fed chief noted that the US economy is growing moderately this year and unemployment has fallen to a four-year low of 7.5%. But unemployment remains well above levels consistent with healthy economies.

Ben Bernanke warned that higher taxes and deep federal spending cuts are expected to slow economic growth this year.

His comments about the many risks facing the economy, along with the benefits gained so far from the Fed's stimulus, suggest the Fed is not ready to taper bond purchases that have helped lower long-term interest rates to encourage more borrowing and spending.

The Fed has said it plans to continue its $85 billion a month in Treasury and mortgage bond purchases until the job market improves substantially. And after its April 30-May 1 meeting, the Fed said it could increase or decrease the pace depending on how the job market and inflation fare.

Investors have been closely scrutinising policymakers' comments since then for clues about the pace of the bond purchases. Bernanke has had solid support for the bond purchases among the voting members of the Fed's interest-rate setting committee.

At each of the Fed's three policy meetings this year, the committee has approved the purchases 11-1.

In recent months, the job market and the broader economy have shown renewed vigour. The economy has added an average of 208,000 jobs a month since November. That is up from only 138,000 a month in the previous six months.

The US economy has benefited from a resurgent housing market, rising consumer confidence and the Fed's stimulus actions, which have helped ignite a stock market rally.

The Standard & Poor's 500 stock index has jumped 17% this year to a record high. Higher stock prices tend to make many people feel wealthier and more inclined to spend.

But those gains are partly why critics of the bond purchases, including some Fed regional bank presidents, have questioned the need to continue them at their current pace. They argue that keeping interest rates too low for too long could send inflation surging or inflate dangerous bubbles in assets such as stocks or property. Such a bubble could burst with the same destabilising effects that the housing bust caused.