Premature Fed pullback could "short-circuit" recovery: Bernanke

Sat Mar 2, 2013 8:37am EST

Chairman of the U.S. Federal Reserve Ben Bernanke testifies at the House Committee on Financial Services on Capitol Hill in Washington, February 27, 2013. REUTERS/Larry Downing

Chairman of the U.S. Federal Reserve Ben Bernanke testifies at the House Committee on Financial Services on Capitol Hill in Washington, February 27, 2013.

Credit: Reuters/Larry Downing

(Reuters) - Ben Bernanke, the chairman of the Federal Reserve, said on Friday that pulling back on aggressive policy measures too soon would pose a real risk of damaging a still-fragile recovery.

There has been some disagreement within the Fed of whether the central bank's bond-buying program, which is designed to push down long-term interest rates, should be phased out.

Fed Board Governor Jeremy Stein argued recently there were signs of overheating in certain financial markets and that the central bank should consider using monetary policy to address such risks if they persist.

The Fed chief was not convinced, saying that, even for the purposes of financial stability, a continuation of the central bank's aggressive stimulus, conducted through purchases of Treasury and mortgage securities, remains the optimal approach.

"In light of the moderate pace of the recovery and the continued high level of economic slack, dialing back accommodation with the goal of deterring excessive risk-taking in some areas poses its own risks to growth, price stability, and, ultimately, financial stability," Bernanke said in remarks prepared for delivery at a conference sponsored by the Federal Reserve Bank of San Francisco.

In response to the financial crisis and deep recession of 2007-2009, the Fed not only chopped official rates to effectively zero, but also bought more than $2.5 trillion in assets in an effort to keep long-term rates low.

Still, economic growth remains subdued and is expected to register just 2 percent this year, while the jobless rate remains elevated at 7.9 percent currently.

"Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading - ironically enough - to an even longer period of low long-term rates," Bernanke said.

He noted that a stimulative monetary policy was simply a response to economic conditions, rather than any attempt to keep rates artificially low to inflate asset prices.

Policymakers are cognizant of possible risks to financial stability, he said, while indicating a preference for employing regulatory and supervisory tools to mitigate any possible fallout from the Fed's low-rate policy.

"We pay special attention to developments at the largest, most complex financial firms," Bernanke said.

He argued banks had gone some way toward repairing their balance sheets since the financial crisis. The Federal Deposit Insurance Corp. reported this week that bank profits rose in 2012 to their highest levels since 2006, the year before the subprime mortgage meltdown gained momentum.

Earlier this week, Bernanke delivered a strong defense of the Fed's unconventional monetary policies in testimony before Congress. He also warned lawmakers to avoid the looming short-term spending cuts known as the sequester.

(Reporting By Pedro Nicolaci da Costa in Washington, D.C.; Editing by Leslie Adler)

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Comments (3)
Robertla wrote:
” He noted that a stimulative monetary policy was simply a response to economic conditions, rather than any attempt to keep rates artificially low to inflate asset prices. ”

wow………true Orwellian doublespeak

Mar 02, 2013 2:05am EST  --  Report as abuse
Any Fed pullback will shortcut the rally. Does anyone, in their heart, actually believe Mr. Bernanke? Our economy cannot grow at all without continuing Fed stimulus of some type and deficit spending. The word “continuing” is the problem. Government/Central Bank support in the short term is certainly reasonable (think 2008-10 perhaps). The debate today is how many years and how much monetary stimulus/deficit spending can be considered reasonable. That’s the debate. Many of us don’t believe the economy has recovered. We believe we’re running on stimulus. As an old economics professor of mind was fond of saying “We will know in the fullness of time.”

Mar 02, 2013 9:17am EST  --  Report as abuse
AdamSmith wrote:
The Fed’s QE is the biggest boon to the wealthy ever witnessed by modern markets.

The Fed has been buying up, from the wealthy, every worthless note the wealthy had been stuck with. The Fed has been buying everything, you name it. Worthless junk that nobody else would buy, the Fed has been buying it for top dollar, taking it off the hands of the wealthy.

The wealthy can barely contain themselves at their good fortune. Who would have thought they could get rid of those worthless pieces of paper? Yet, the Fed has now paid them roughly $1.5 trillion in cold, hard cash.

The wealthy, who had expected to lose everything, are now made richer than ever.

The Fed are very happy to accomodate them using the government’s money, and get invited to the country-club parties of the elite. And even President Obama, too, yearns for the invitations to the country-club parties of the elite, so he’s all in with the QE scheme too. No problem.

Once again in life, the wealthy criminal class wins, effortlessly. And the common man is ground into the floor under their heal.

QE is a far greater crime than TARP, and far more subtle for the average citizen to grasp.

Mar 02, 2013 10:02am EST  --  Report as abuse
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