[h=3]By VICTORIA MCGRANE And COREY BOLES[/h]
Market watchers were hoping for a dovish message from Fed Chairman Ben Bernanke ... and they got exactly what they wanted. Steve Russolillo joins Markets Hub. Photo: AP.
WASHINGTON—Federal Reserve Chairman Ben Bernanke signaled Tuesday that the central bank would continue its bond-buying programs, arguing that the benefits of the bank's easy-money policies for the broader economy still outweigh the potential risks.
Mr. Bernanke, in testimony prepared for his semiannual appearance on Capitol Hill, said the Fed takes "very seriously" the potential risk that its policies could fuel excessive risk-taking and is watching markets carefully. "To this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation," Mr. Bernanke said.
Minutes from the Fed's January policy-making released last week spooked markets because they showed officials expressing concern that the Fed's unconventional policies could spark financial instability. The minutes also showed the Fed was debating whether it might need to stop its open-ended bond-buying programs earlier than expected.
ReutersFederal Reserve Board Chairman Ben Bernanke said Tuesday the benefits of the Fed's bond-buying program still outweigh the potential risks.
In testimony to the Senate Banking Committee, Mr. Bernanke made a strong case for the benefits the Fed's policies continue to produce, although he stressed that the central bank is closely monitoring potential risks. He said the Fed's low-interest rate policies have helped spark a housing market recovery, spurred sales of automobiles and other durable goods and encouraged consumer spending.
But the Fed can't shoulder the entire burden for inducing a more robust economic recovery, Mr. Bernanke said. Just days before across-the-board cuts to the federal budget are set to take effect Friday, the Fed chief urged Congress and the Obama administration to replace the automatic cuts known as the sequester with more gradual budgetary belt tightening.
He said the $85 billion in cuts should be replaced with "policies that reduce the federal deficit more gradually in the near-term but more substantially in the longer run."
The $85 billion in spending reductions—split between federal funding of the Pentagon and other domestic programs and departments—serve as a down payment on $1.2 trillion in cuts required over the next decade under current law.
Mr. Bernanke cited Congressional Budget Office estimates that the sequester would reduce economic growth by 0.6%. "Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant," he said. Not only would the budget cuts hurt hiring and incomes, the slower recovery the cuts would produce would keep deficits higher than they otherwise would be, Mr. Bernanke said.
Lawmakers have shown little willingness to negotiate a compromise to avert the cuts before they begin and are focusing more on the end of March when the possibility of a government shutdown exists without a new temporary bill funding federal operations.
Mr. Bernanke said that GDP was "essentially flat" in the fourth quarter of 2012, but that the pause "does not appear to reflect a stalling-out of the recovery" and that available information indicates growth has picked up again this year.
The Commerce Department last month reported that the U.S. economy shrank at a 0.1% annual rate in the fourth quarter, but private forecasters expect that number to revise that number up later this week.
Mr. Bernanke noted that gas prices have risen recently as a result of both higher crude oil prices and wider refining margins, causing pain for family budgets. "However, overall inflation remains low," he said, reiterating that Fed policy makers believe inflation over the medium term will likely remain at or below the central bank's 2% target.
The Fed chief also addressed concerns that the Fed could go through a period of having little or no money to hand over to the U.S. Treasury once the central bank begins unwinding its bond-buying programs.
Under law, the Fed is required to use its income to cover operating expenses and send much of the rest to the Treasury's general fund. Those payments by the Fed to the Treasury are called remittances. As Mr. Bernanke noted, the past few years have been extremely profitable for the Fed thanks to the bond-buying programs. Yearly remittances have roughly tripled in recent years, with the Fed sending about $290 billion to taxpayers between 2009 and 2012, he said.
Some Fed watchers worry that a reduction in remittances could cause political headaches for the Fed and that lawmakers could try to influence the central bank's policy decisions in order to keep the remittances coming into federal coffers.
Those payments would "likely decline in coming years" as the economy strengthens and the Fed tightens policy, Mr. Bernanke said. Still, he noted that it is "highly likely" that on average the Fed will have sent more each year to the Treasury during the years of its bond buying than it did before the 2008 financial crisis.
"Moreover, to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve's remittances to Treasury," he said.
Write to Victoria McGrane at [email protected] and Corey Boles at [email protected]
Market watchers were hoping for a dovish message from Fed Chairman Ben Bernanke ... and they got exactly what they wanted. Steve Russolillo joins Markets Hub. Photo: AP.
WASHINGTON—Federal Reserve Chairman Ben Bernanke signaled Tuesday that the central bank would continue its bond-buying programs, arguing that the benefits of the bank's easy-money policies for the broader economy still outweigh the potential risks.
Mr. Bernanke, in testimony prepared for his semiannual appearance on Capitol Hill, said the Fed takes "very seriously" the potential risk that its policies could fuel excessive risk-taking and is watching markets carefully. "To this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation," Mr. Bernanke said.
Minutes from the Fed's January policy-making released last week spooked markets because they showed officials expressing concern that the Fed's unconventional policies could spark financial instability. The minutes also showed the Fed was debating whether it might need to stop its open-ended bond-buying programs earlier than expected.
ReutersFederal Reserve Board Chairman Ben Bernanke said Tuesday the benefits of the Fed's bond-buying program still outweigh the potential risks.
In testimony to the Senate Banking Committee, Mr. Bernanke made a strong case for the benefits the Fed's policies continue to produce, although he stressed that the central bank is closely monitoring potential risks. He said the Fed's low-interest rate policies have helped spark a housing market recovery, spurred sales of automobiles and other durable goods and encouraged consumer spending.
But the Fed can't shoulder the entire burden for inducing a more robust economic recovery, Mr. Bernanke said. Just days before across-the-board cuts to the federal budget are set to take effect Friday, the Fed chief urged Congress and the Obama administration to replace the automatic cuts known as the sequester with more gradual budgetary belt tightening.
He said the $85 billion in cuts should be replaced with "policies that reduce the federal deficit more gradually in the near-term but more substantially in the longer run."
The $85 billion in spending reductions—split between federal funding of the Pentagon and other domestic programs and departments—serve as a down payment on $1.2 trillion in cuts required over the next decade under current law.
Mr. Bernanke cited Congressional Budget Office estimates that the sequester would reduce economic growth by 0.6%. "Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant," he said. Not only would the budget cuts hurt hiring and incomes, the slower recovery the cuts would produce would keep deficits higher than they otherwise would be, Mr. Bernanke said.
Lawmakers have shown little willingness to negotiate a compromise to avert the cuts before they begin and are focusing more on the end of March when the possibility of a government shutdown exists without a new temporary bill funding federal operations.
Mr. Bernanke said that GDP was "essentially flat" in the fourth quarter of 2012, but that the pause "does not appear to reflect a stalling-out of the recovery" and that available information indicates growth has picked up again this year.
The Commerce Department last month reported that the U.S. economy shrank at a 0.1% annual rate in the fourth quarter, but private forecasters expect that number to revise that number up later this week.
Mr. Bernanke noted that gas prices have risen recently as a result of both higher crude oil prices and wider refining margins, causing pain for family budgets. "However, overall inflation remains low," he said, reiterating that Fed policy makers believe inflation over the medium term will likely remain at or below the central bank's 2% target.
The Fed chief also addressed concerns that the Fed could go through a period of having little or no money to hand over to the U.S. Treasury once the central bank begins unwinding its bond-buying programs.
Under law, the Fed is required to use its income to cover operating expenses and send much of the rest to the Treasury's general fund. Those payments by the Fed to the Treasury are called remittances. As Mr. Bernanke noted, the past few years have been extremely profitable for the Fed thanks to the bond-buying programs. Yearly remittances have roughly tripled in recent years, with the Fed sending about $290 billion to taxpayers between 2009 and 2012, he said.
Some Fed watchers worry that a reduction in remittances could cause political headaches for the Fed and that lawmakers could try to influence the central bank's policy decisions in order to keep the remittances coming into federal coffers.
Those payments would "likely decline in coming years" as the economy strengthens and the Fed tightens policy, Mr. Bernanke said. Still, he noted that it is "highly likely" that on average the Fed will have sent more each year to the Treasury during the years of its bond buying than it did before the 2008 financial crisis.
"Moreover, to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve's remittances to Treasury," he said.
Write to Victoria McGrane at [email protected] and Corey Boles at [email protected]