The past few weeks have not been easy ones for Federal Reserve Chairman Ben Bernanke. Markets have been volatile and speculation about the Fed’s plans has been rampant ever since he hinted in June about the end of the central bank’s bond-buying program, but none of that appears to have shaken his confidence.
The 59 year-old former Princeton professor appeared on Capitol Hill Thursday and Wednesday to deliver the Fed’s semi-annual monetary policy report to both chambers of Congress for what will likely be the last time. Bernanke is widely expected to leave the Fed when his term expires in January.
In his prepared statements, and in exchanges with lawmakers, Bernanke projected confidence in his and the Fed’s management of the money supply, expressing optimism about the economy and the Fed’s endlessly debated plans for tapering its monthly large-scale bond purchases down from the current $85 billion rate.
Critics have questioned whether the Fed’s timeline for reducing stimulus, sketched out by Bernanke at a June 19 press conference, would cut back monetary accommodation for a still-weak economy too early. After markets initially fell and bond yields shot up following Bernanke’ remarks, a parade of other Fed officials reassured the public that their plans were conditional on continued economic improvement and that they would not tighten the money supply too soon. Nevertheless, Wall Street banks, such as Goldman Sachs and J.P. Morgan, announced that they expect the taper following the Fed’s September meeting, the earliest date possible.
What is becoming clear is that Bernanke is comfortable with that reaction.
“I think we’re doing a reasonable job of communicating,” Bernanke said Wednesday. He explained that risking financial volatility by setting an end date for stimulus purchases is better than allowing investors’ expectations diverge from the Fed’s plans for eventually winding down its bond-buying program.
Bernanke also indicated a broader shift in the Fed’s approach to easing monetary conditions, from relying on so-called “quantitative easing” to making greater use of communications about interest rates and the size of the Fed’s balance sheet.
“Notwithstanding how the mix of tools changes, we’re going to maintain a high level of monetary accommodation for the foreseeable future,” Bernanke told Rep. Patrick Murphy, D-Fla., on Wednesday.
Bernanke repeated that message in response to a question from Sen. Robert Menendez on Thursday. “I’ve distinguished between changing the mix of our two tools and the overall thrust of monetary policy,” Bernanke said. He reassured the New Jersey Democrat that “we’ll be able to maintain that accommodation … through rate policy and holding a very large balance sheet.” Bernanke has asserted on a number of occasions that he views the size of the Fed’s asset holdings, rather than the pace of asset purchases, as the key to stimulating the economy.
In other words, while the public’s attention has been wrapped up in the fate of the Fed’s monthly bond purchases, Bernanke has been thinking about conducting monetary policy by relying more on other tools at the Fed’s disposal. If the economy falters in the future, he expects the Fed to react by promising to keep rates lower, and the balance sheet expanded, for longer, rather than adding stimulative bond purchases.
During the two days’ of hearings, Bernanke also subtly but surely dismissed two concerns about the awaited taper, namely that the economy is not improving at the pace the Fed had anticipated, and that there was more disagreement than Bernanke had let on about the plans to lower asset purchases to zero as unemployment fell to 7 percent.
Rep. John Delaney, D-Maryland, asked if new data released after the June meeting of the Fed’s monetary policy committee had changed Bernanke’s assessment of the strength of the economy, and consequently his outlook for tapering the stimulus. Bernanke responded simply “no,” saying that the Fed still expects the economy to continue to improve, unemployment to keep falling, and inflation to slowly rise toward the 2 percent goal. “That general scenario stills seems correct,” Bernanke said.
There had been some question of whether the majority of the Fed governors and regional bank presidents supported the plan to taper asset purchases to zero as the unemployment rate lowered to 7 percent. St. Louis Fed president James Bullard, in particular, had openly questioned Bernanke’s announcement of the 7 percent threshold at the most recent meeting in a June 21 press release. Furthermore, the recently released minutes from the meeting didn’t show any discussion of the 7 percent threshold, and generally hinted at greater disagreement among Fed officials than Bernanke led the public to believe when he said during his June 19 press conference that he had been “deputized” by his colleagues to outline the plan.
But when Rep. Spencer Bachus, R-Ala., questioned Bernanke about the basis for the 7 percent threshold, Bernanke replied that there was a “go-around” of Fed officials and that “there was good support for both the broad plan that I described and for the use of 7 percent as indicative of the kind of improvement we’re trying to get.”
When Sen. Chuck Schumer, D-N.Y., sharpened the same question Thursday, Bernanke was even more direct. “Let me assure you,” he said, the 7 percent threshold was “broadly supported” by Fed members, including both voting and non-voting members of the Federal Open Market Committee, despite there being “diverse views on this program.”
It’s “way too early to make any judgment” on whether the Fed will being the taper at its September meeting, Bernanke told Schumer, without discounting the possibility that it would. He clarified that the Fed looks for improvement in the outlook for labor markets, rather than “labor markets per se,” meaning that the Fed could begin slowing purchases even if jobs data leading up to the meeting showed weak gains.
It’s possible that President Obama could name a replacement for Bernanke before the September meeting. If, as was assumed by members of both houses of Congress this week in their interactions with him, Bernanke is planning on leaving the Fed in January, it seems that he is comfortable with the status of the program he will leave for his successor.