Fed Stimulus Still Needed to Help Recovery, Bernanke Says

While acknowledging the risks of historically low interest rates and the Fed’s aggressive policy of buying government bonds to help stimulate the economy, Mr. Bernanke said in testimony that “a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.”

After his opening statement, however, Mr. Bernanke seemingly opened the door a bit wider to tapering down.

Under questioning by Representative Kevin Brady, a Texas Republican who chairs the Joint Economic Committee, Mr. Bernanke said the Fed could prepare to “take a step down” in the next few meetings if the outlook for the labor market improved.

“It’s dependent on the data,” he said. “If the outlook for the labor market improves, we would respond to that.”

Mr. Brady asked if the tapering could begin before Labor Day, prompting Mr. Bernanke to say, “I don’t know.”

“We are buying a certain amount of assets each month,” he continued. “We are looking for increased confidence and in steps respond to that.”

In his opening statement, Mr. Bernanke said that since last summer, “financial conditions in the euro area have improved somewhat,” helping lessen the headwinds faced by the American economy as well.

He noted that the federal government’s fiscal policy had become “significantly more restrictive,” even as the Fed had pursued a looser monetary policy. The expiration of the payroll tax reduction in January and tax increases, as well as automatic spending cuts imposed by Congress and lower military spending, will collectively “exert a substantial drag on the economy this year.”

Speculation had been rising in recent weeks that the Fed might be preparing to taper its bond purchases, which total $85 billion a month. The bond-buying program has been credited with increasing growth, but some observers worry it could create a bubble in the prices of assets like stocks.

At its most recent meeting this month, the Fed said it was “prepared to increase or reduce the pace of its asset purchases,” prompting some analysts to speculate that bond purchases might be reduced in the coming months.

“In considering whether a recalibration of the pace of its purchases is warranted,” Mr. Bernanke told the Joint Economic Committee, the Fed “will continue to assess the degree of progress made toward its objectives in light of incoming information.”

Stocks on Wall Street surged after Mr. Bernanke’s remarks but pulled back in afternoon trading.

This article has been revised to reflect the following correction:

Correction: May 22, 2013

An earlier version of this article incorrectly described the timing given by Mr. Bernanke of a potential Fed move. He said the Fed could prepare to “take a step down” in the next few meetings, not the next few weeks.

This article has been revised to reflect the following correction:

Correction: May 22, 2013

Article source: http://www.nytimes.com/2013/05/23/business/economy/bernanke-fed-stimulus-still-needed-to-help-recovery.html?partner=rss&emc=rss