Federal Reserve Board Chairman Ben Bernanke told lawmakers Wednesday that if the economy fails to satisfy the Fed's expectations, its plans to taper bond buying could change and the Fed could even "potentially increase purchases for a time."
The economy continues to recover at a "moderate pace," with housing having contributed "significantly" to recent gains, but the unemployment rate is only seeing "moderate" improvement — standing at 7.6 percent in June, Bernanke said in the Fed's semiannual monetary report to members of the House Financial Services Committee.
Bernanke signaled to the committee that the Fed would adjust its bond-buying program — better known as quantitative easing — depending on how the economy performs. "Our intention is to keep monetary policy accommodative," he said.
"We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low — our second tool — to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels," Bernanke told lawmakers.
After Bernanke delivered his report, 10-year Treasury yields fell to 2.49 percent from 2.63 percent. The Dow Jones industrial average rose 0.1 percent in afternoon trading, while the Standard & Poor's 500 index and Nasdaq rose 0.3 percent and 0.2 percent respectively.
In late June, Bernanke said that the Fed would likely curtail its stimulus bond buying later this year, which sent the markets into a tailspin and spooked investors.
As Bernanke stated in his prepared testimony, "if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly." However, "on the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions — which have tightened recently — were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer."
Jim O'Sullivan, chief U.S. economist at High Frequency Economics, noted in reaction to Bernanke's testimony, that in starting to scale down the purchasing program, "the data will matter," as Bernanke said the Fed is not "on a preset course." O'Sullivan said that Bernanke was "emphasizing the no-imminent-tightening point a bit more" than he has before.
The lengthy hearing covered many issues, including worries about the recent spike in mortgage interest rates. "Mortgage rates are a bit higher and we have to monitor that," Bernanke said. "We'll see how housing and house prices go from here."
