* Fed expects to trim bond buys but not on preset course
* Bernanke says eventual rate hike cycle to be gradual
* Fed chief says Fed could ramp up bond purchases if needed
* Remarks lift U.S. stocks and bonds, dollar firms
By Alister Bull and Pedro da Costa
WASHINGTON, July 17 Federal Reserve Chairman Ben
Bernanke said on Wednesday the U.S. central bank still expects
to start scaling back its massive bond purchase program later
this year, but he left open the option of changing that plan if
the economic outlook shifted.
While sticking closely to a timeline to wind down the bond
buying that he first outlined last month, Bernanke went out of
his way to stress that nothing was set in stone.
"Our asset purchases depend on economic and financial
developments, but they are by no means on a preset course," he
told the House of Representatives Financial Services Committee.
Under the plan Bernanke laid out on June 19, the U.S.
central bank would likely reduce its monthly bond buys later
this year and halt them altogether by mid-2014, as long as the
economic recovery unfolds as expected.
He did not depart from that guidance on Wednesday, but he
said the current $85 billion monthly pace of purchases could be
reduced "somewhat more quickly" if economic conditions improved
faster than expected. On the other hand, it "could be maintained
for longer" if the labor market outlook darkened, or inflation
did not appear to be rising toward the Fed's 2 percent goal.
"Indeed, if needed, the (Fed's policy) committee would be
prepared to employ all its tools, including an increase (in) the
pace of purchases for a time, to promote a return to maximum
employment in a context of price stability," Bernanke said.
The remarks lifted U.S. stock prices modestly and government
debt prices also rose. The dollar firmed against the euro and
"There is something in these comments for everybody," said
Omer Esiner, chief market analyst at Commonwealth Foreign
Exchange in Washington. "Bernanke has done a good job of leaving
himself plenty of maneuver room in terms of policy."
Bernanke's testimony to Congress on the Fed's semi-anual
monetary policy report may be his last if he steps down when his
term as chairman ends in January, as many expect, and a number
of lawmakers lauded him for his service.
Under Bernanke, the Fed has held overnight interest rates
near zero since December 2008 and more than tripled its balance
sheet to about $3.46 trillion with bond purchases aimed at
driving down longer-term borrowing costs and spurring investment
CALMING THE WATERS
Bernanke set off a brief but fierce global market sell-off
last month when he outlined the Fed's plans to curtail its
so-called quantitative easing, and he has joined a slew of
officials since then who have spelled out their intention to
keep rates near zero well after the bond buying ends.
Bernanke acknowledged that one of his motives in talking
about tapering last month had been to head off a possible bubble
in financial markets. Many economists had suspected that had
been an important reason.
"Not speaking about these issues would have risked a
dislocation, a moving of market expectations away from the
expectations of the (Fed's policy) committee. It would have
risked increased build-up of leverage or excessively risky
positions in the market," he said.
While the end of the Fed's bond buying may be in view,
Bernanke repeated that officials will keep rates near zero at
least until the jobless rate, which stood at 7.6 percent in
June, falls to 6.5 percent, as long as inflation remains in
He also said the Fed would look closely at any decline in
unemployment to see whether it was being driven by strength in
hiring or a decline in the number of Americans looking for work,
in which case the central bank would be more patient before
Any rate hike cycle, he said, would be gradual.
"We intend to be very responsive to incoming data, both in
terms of our asset purchases - but it's also important to
understand that our overall policy, including our rate policy,
is going to remain highly accommodative," Bernanke said.
The testimony led traders in futures markets to push back
their expectations for when rates will rise to December 2014
from as early October 2014 a day earlier. The Fed said last
month that 14 of its 19 policymakers do not believe it would be
appropriate to raise rates until sometime in 2015.
As for bond purchases, economists on Wall Street expect the
Fed to start reducing them at its meeting in September.
Speaking about the Fed's bloated balance sheet, Bernanke
suggested the central bank would hold the government bonds it
has bought for a long time, if not to maturity, and reinvest any
proceeds to keep its balance sheet from shrinking quickly.
RECOVERING AT A MODEST PACE
Some Fed officials have been concerned about the low level
of inflation and have expressed a hesitance to trim bond
purchases until inflation quickens. The central bank's preferred
price gauge is a full percentage point below its target.
Bernanke repeated his view that transitory factors appeared
to be restraining price gains, although he said policymakers
were aware that very low inflation raised the risk of an
outright deflation, which could sap the economy's strength.
Data on Tuesday showed that inflation firmed last month, and
hiring in recent months has been relatively strong.
However, the government said on Wednesday groundbreaking for
homes fell to a 10-month low. In addition, retail sales were
weak in June, and second-quarter GDP growth is expected to come
in at around a dismal 1 percent annual rate, painting a very
mixed picture for Fed policymakers.
Bernanke, who appears for a second day of testimony before
the Senate Banking Committee on Thursday, said the economic
recovery was continuing at a moderate pace thanks to a generally
stronger housing sector, which was helping conditions in the
labor market improve gradually.
He also repeated that the Fed felt the risks to the economy
had decreased since the fall.
But he said higher taxes and cuts in federal spending could
exert a larger drag on growth than expected, and that worsening
conditions overseas could hurt conditions back home.
"With the recovery still proceeding at only a moderate pace,
the economy remains vulnerable to unanticipated shocks,
including the possibility that global economic growth may be
slower than currently anticipated," Bernanke said.