“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 today in testimony to the Joint Economic Committee of Congress in Washington. Bernanke lamented the human and economic costs of an unemployment rate at 7.5 percent nearly four years into the recovery from the deepest recession since the Great Depression, and said the Fed’s easing is providing “significant benefits.” His comments echoed remarks by William C. Dudley, president of the Federal Reserve Bank of New York, who said in an interview that it would take three to four months before policy makers will know whether a sustainable recovery is in place. Fed officials “need to see inflation expectations remain in a desired range, they need to see that the peak home-buying season goes as well as it can, and they need to see that we have absorbed the bulk of the huge fiscal consolidation” before they reduce the pace of purchases from $85 billion a month, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
Rally Erased
Stocks erased an early rally and Treasuries fell after Bernanke said the Fed could “take a step down in our pace of purchases” in the “next few meetings.” “We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook,” Bernanke said in response to a question from Representative Kevin Brady, the Texas Republican who chairs the committee. “If we see continued improvement and we have confidence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases.” Bernanke’s caution was underscored by minutes of the Fed’s last meeting, released after his testimony, which showed many Fed officials said more progress in the labor market is needed before deciding to slow the pace of asset purchases.
Diminished Risks
“Most observed that the outlook for the labor market had shown progress” since the bond-buying program began in September, according to the record of the April 30-May 1 gathering. “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.” The minutes also said that a “number” of officials were willing to taper bond buying as early as the next meeting in June if economic reports show “evidence of sufficiently strong and sustained growth.”
The Standard & Poor’s 500 Index fell 0.8 percent to 1,655.35 at the close in New York. Yields on the U.S. 10-year note climbed 11 basis points, or 0.11 percent, to 2.04 percent, rising above 2 percent for the first time since March. “The market reacts pretty wildly to any hint of exit,” said Michael Hanson, senior economist at Bank of America Corp. in New York. “It’s a small exit and a lot of people are trying to get out of it -- like a rock concert.”
More Evidence
