* Bernanke touts benefits of Fed bond buying
* Says end to purchases will depend on economy
* Could trim bond buys at one of the "next few meetings"
* If anything, "inflation is too low," Bernanke says
By Pedro da Costa and Alister Bull
WASHINGTON, May 22 The Federal Reserve's
monetary stimulus is helping the U.S. 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.
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
emphasized the high costs of both unemployment and inflation,
which respectively continue to run above and below the Fed's
"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
"Monetary policy has also helped offset incipient
deflationary pressures and kept inflation from falling even
further below the (Fed's) 2 percent longer-run objective."
Still, financial markets focused on the possibility that Fed
purchases will be scaled back later this year. The S&P 500
closed 0.8 percent lower, the dollar hit a near
three-year peak against a broad basket of currencies, and
the bond market sold off sharply. Yields on 10-year Treasury
notes jumped back above 2 percent to their highest
levels since mid-March.
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. It is the third round of asset purchases, or
quantitative easing, since the Fed drove interest rates to near
zero in late 2008.
"I believe the Fed, while feeling more confident in the
economy bottoming, is not yet comfortable with ending QE and the
U.S. economic crutch it offers," said Douglas Borthwick,
managing director of Chapdelaine Foreign Exchange in New York.
MISSING THE TARGET
Bernanke noted that the main inflation gauge the Fed
monitors rose just 1 percent in the 12 months through March,
just half the central bank's 2 percent target.
Part of the reason, he said, was a decline in energy prices.
But there were also indications of more broad-based
disinflation, Bernanke said.
He said the Fed was prepared either to increase or reduce
the pace of its bond buys depending on economic conditions, as
the central bank stated on May 1 after its last policy meeting.
"If we see continued improvement and we have confidence that
that's going to be sustained then we could in the next few
meetings ... take a step down in our pace of purchases," he
"If we do that it would not mean that we are automatically
aiming toward a complete wind down. Rather, we would be looking
beyond that to see how the economy evolves and we could either
raise or lower our pace of purchases going forward."
U.S. economic growth rose to a 2.5 percent annual rate in
the first quarter following an anemic end to 2012. The
unemployment rate has fallen to 7.5 percent from a peak of 10
percent, but remains, as Bernanke put it, "well above its
longer-run normal level."
Recent economic data have been mixed. Job growth, retail
sales and housing have all shown some vigor, but factory output
has been contracting.
Bernanke said some headwinds facing the economy, including
the debt crisis in Europe, have been dissipating. But he said a
sharp tightening of the U.S. government's budget had become too
big of a drag on growth for the central bank to offset fully.
Bernanke told the committee the Fed was aware of the risk
that keeping monetary policy too easy for too long could fuel
asset price bubbles. However, he said the central bank believed
major asset prices were justified by the economy's fundamentals.
Further, he warned of the risks to pulling back on stimulus
"A premature tightening of monetary policy could lead
interest rates to rise temporarily but would also carry a
substantial risk of slowing or ending the economic recovery and
causing inflation to fall further," Bernanke said.
He also suggested the Fed could refrain from selling off
some of the mortgage-backed securities it has acquired when the
time finally came to tighten monetary policy. "I personally
believe that we could exit without selling any MBS," he said.
TOO SOON TO TAPER
In separate remarks, New York Fed President William Dudley
stressed that uncertain economic conditions meant it was too
early to determine whether to taper the Fed's bond purchases.
"I think three or four months from now you'll have a much
better sense of 'Is the economy healthy enough to overcome the
fiscal drag or not?'" Dudley said in a Bloomberg TV interview
that took place on Tuesday but aired on Wednesday.
Dudley added that it would be possible to dial down the
program by the fall "if the economy does better and if the labor
market continues to improve."
The minutes of the last Fed meeting said a number of
officials expressed a willingness to taper bond purchases as
early as the upcoming meeting on June 18-19 if there were signs
of "sufficiently strong and sustained growth." But views
differed both on how to gauge progress and on how likely it was
that that threshold would be met.
Asked whether the Fed would curtail the pace of its bond
purchases by the Sept. 2 Labor Day holiday, Bernanke said
simply: "I don't know."