WASHINGTON — Federal Reserve Chairman Ben Bernanke began a two-day report before Congress Wednesday where he distressed lawmakers and relieved markets with his testimony on the Fed’s ongoing monetary policy.
Bernanke started his semi-annual report before the House Financial Services Committee, and began his testimony by saying the Fed’s $85 million bond buying policy is “by no means on a preset course.”
The statement from his prepared remarks is a step back from the chairman’s June press conference, where Bernanke hinted generally and for the first time that the Fed would wind down the stimulus spending keeping current interest rates low.
Texas Republican and Financial Services Chairman Rep. Jeb Hensarling noted that markets took the hint, but with a much less subtle reaction as they shed points and hit year long lows in anticipation of Bernanke’s unspecified fall timeline for easing Fed spending.
“We’re in a difficult environment,” Bernanke said, later acknowledging that “not surprising” the markets and being open about future changes would be important to reducing spending on future monetary policy.
“I think the markets are beginning to understand our message. The volatility has obviously moderated,” Bernanke said.
Committee Republicans repeatedly expressed concerns that the Fed had lost control of its record stimulus spending — a concern exemplified by last month’s market tumble in response to Bernanke’s mere mention of slowing the pace of buying. Bernanke disagreed, saying the Fed policy was not the reason for the wavering economy.
“The reason for the low interest rates is because the economy is weak and inflation is low,” Bernanke said.
In fact, spending may even go up according to Bernanke, who said he aims to keep interest rate policy “highly accommodative” for markets, even if that means an increase in bond purchasing. Any plans to reduce spending will follow indications of strong, independent economic growth.
The Chairman went on to indict Congress as part of the problem necessitating the increased Fed spending, citing higher taxes and sequestration as causes of high unemployment and slow economic growth.
“My suggestion to Congress is to consider possibilities that involve somewhat less restraint in the near term and more action to make sure we are on a sustainable path in the long run,” Bernanke said.
Bernanke indicated during the June press conference that a falling unemployment rate — around 7 percent — would be a Fed trigger for tightening monetary policy.
Market reactions were positive following the Chairman’s decidedly differing testimony this time around. The Dow Jones Industrial average held steady, with the Standard & Poor and Nasdaq composite indexes rising 0.2 percent in afternoon trading.
The ten-year Treasury yield fell from 2.63 percent to 2.49 percent — indicating that investors were reassured that there will be no immediate change or planned timeline for reduced bond buying by the Fed.
Wednesday’s hearing was expected to be Bernanke’s last before the House committee as Chairman of the Federal Reserve, with expectations he will step down in January. As a result, numerous representatives forwarded their questions with praiseful remarks for the Chairman and his years of service.
“You’ve had a lot of compliments today — in my business, it’s called a eulogy,” Missouri Democrat and United Methodist Pastor Rep. Emanuel Cleaver told Bernanke. “I’m not trying to frighten you. Even the Twinkie came back.”