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HindustanTimes Thu,18 Sep 2014

Fed not ready to pull back on stimulus

Reuters  Washington, May 23, 2013
First Published: 22:06 IST(23/5/2013) | Last Updated: 22:07 IST(23/5/2013)

The Federal Reserve’s monetary stimulus is helping the US economy recover but the central bank needs to see further signs of traction before taking its foot off the gas pedal, Fed chairman Ben Bernanke said on Wednesday.

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A decision to scale back the $85 billion in bonds the Fed is buying each month could come at one of the central bank’s “next few meetings” if the economy looked set to maintain momentum, Bernanke told Congress.

But minutes from the Fed’s most recent meeting released on Wednesday showed the bar was still relatively high.

“Many participants indicated that continued (job market) progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases,” according to minutes from the April 30-May 1 meeting.

In testimony that showed little immediate desire to retreat from the Fed’s third and latest round of bond buying, Bernanke emphasised the high costs of both unemployment and inflation, which respectively continue to run above and below the Fed’s targets.

“Monetary policy is providing significant benefits,” he told the congressional Joint Economic Committee, citing strong consumer spending on autos and housing, as well as increases in household wealth.

“Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed’s) 2% longer-run objective.”

Still, financial markets focused on the possibility that Fed purchases will be scaled back later this year.

The central bank is currently buying $45 billion in Treasury bonds and $40 billion in mortgage-backed debt each month to keep borrowing costs low and encourage investment, hiring and economic growth.

“I believe the Fed, while feeling more confident in the economy bottoming, is not yet comfortable with ending QE and the US economic crutch it offers,” said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York.


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