Federal Reserve Chairman Ben S. Bernanke tempered expectations the Fed will resume buying bonds as criticism from Republican senators highlighted the potential backlash to additional monetary stimulus.
“We’re not proposing anything today,” Bernanke said to the Senate Banking Committee yesterday in Washington. “We just want to make sure that we have the options when they become necessary. But at this point, we’re not proposing to undertake that option,” he said, referring to a third round of quantitative easing, or QE3.
Bernanke appeared for semi-annual congressional testimony the week after the government reported that the jobless rate rose to 9.2 percent last month, with 14.1 million Americans unemployed. The Fed has held its target interest rate near zero for more than 30 months and expanded its balance sheet to a record $2.88 trillion through two rounds of large-scale asset purchases. Policy makers now are waiting to see whether the economy strengthens before changing their stance, Bernanke said.
Tim Johnson, a Democrat from South Dakota and the committee chairman, asked Bernanke why he isn’t starting a new round of purchases to revive growth and reduce unemployment. Senate Republicans such as Richard Shelby of Alabama, Bob Corker of Tennessee and Pat Toomey of Pennsylvania opposed any consideration of increasing the Fed’s record stimulus.
U.S. stocks declined yesterday to the lowest level of the month, with the Standard & Poor’s 500 falling 0.7 percent to 1,308.87 in New York. In House testimony on July 13, Bernanke said the Fed still has tools for stimulus, and that “we have to keep all the options on the table,” driving share prices higher.
“It’s not the whole Congress that says QE3 is a bad idea, but definitely they have to take those opinions into account,” said Roberto Perli, a former Fed economist who is now a managing director at International Strategy & Investment Group in Washington.
“In addition to the external politics from Congress, he has internal dynamics to worry about,” he said. “Discussion of QE3 will be strongly opposed by even more FOMC members because it would start from an even larger balance sheet.”
Dallas Fed President Richard Fisher told reporters on July 13 that “we’ve exhausted our ammunition, in my view,” and “I do not personally see the benefit of more monetary accommodation even if the economy weakens further.”
Shelby, the committee’s senior Republican, said “it appears that the Fed may be going in the wrong direction.”
Shelby criticized the Fed in November when it launched a $600 billon bond-buying program to rejuvenate the economy, saying the purchases, which ended last month, could trigger an inflation surge. Shelby also said bond purchases by the Fed could fuel asset-price bubbles on Wall Street.
"I find the activism at the Fed right now a major turnoff, and I am very concerned,” Corker said to Bernanke during the hearing yesterday.
Should the economy turn out to be weaker than expected, the central bank may provide more monetary stimulus, Bernanke said. More quantitative easing is an option if a recent economic slowdown persists and deflationary forces re-emerge, he said.
As in his July 13 testimony, Bernanke told lawmakers yesterday that the Fed must be flexible and prepared to shift in either policy direction. The Fed may tighten credit if inflation were to rise more than anticipated, he said to the House Financial Services Committee.
“There wasn’t any inconsistency in his remarks” this week, said Jim O’Sullivan, global chief economist at MF Global Inc. Bernanke merely emphasized yesterday “the fact that they aren’t planning QE3 right now,” he said.
Bernanke said the Fed now faces conditions that are different than they were in August, when he signaled a second round of large-scale asset purchases. Then, the economy was in danger of stalling, he said, and the Fed was concerned the country may experience deflation, a broad and prolonged drop in prices, wages and the value of assets such as homes and stocks.
“Today the situation is more complex,” Bernanke told lawmakers. “Inflation is higher. Inflation expectations are close to our target,” he said.
Breakeven inflation rates calculated from yield differences on 10-year Treasury notes and inflation-indexed U.S. government bonds of similar maturity stood at 2.26 percent yesterday. That’s up from 1.62 percent when Bernanke signaled the possibility of a second round of bond purchases at his Aug. 27 speech last year in Jackson Hole, Wyoming.
Waiting for Pickup
“We are uncertain about the near-term developments in the economy,” he said. “We’d like to see if, in fact, the economy does pick up, as we are projecting.”
Bernanke predicted economic growth will pick up in the second half of this year at a pace above 3 percent. He estimated the economy expanded at a 2 percent rate during the first six months of this year, less than necessary to reduce the unemployment rate.
The Fed chief “put a very high bar on doing more QE when he said he has to see the reemergence of deflation risks,” Perli said. “Clearly we are nowhere near that point at this time. To me, that’s the clearest signal that they’re not thinking about it seriously at this stage.”