Quantitative Easing to continue

Bernanke Signals Fed Will Keep Stimulus in Place

Federal Reserve Chairman Ben Bernanke is telling Congress Wednesday that the U.S. job market remains weak and that it is too soon for the Federal Reserve to end its extraordinary stimulus programs.

Daily Finance,

22 May, 2013

Reducing the Fed's efforts to keep borrowing rates low would "carry a substantial risk of slowing or ending the economic recovery," Bernanke said in testimony to the Joint Economic Committee.

Bernanke noted that the economy is growing moderately this year and unemployment has fallen to a four-year low of 7.5 percent. Still, unemployment remains well above levels consistent with healthy economies. And Bernanke said higher taxes and deep federal spending cuts are expected to slow economic growth this year.

His comments about the many risks facing the economy, along with the benefits gained so far from the Fed's stimulus, suggest the Fed is not ready to taper bond purchases that have helped lower long-term interest rates to encourage more borrowing and spending.

Stocks surged after Bernanke's comments. The Dow Jones industrial average (^DJI) was up just 40 points before his comments were released at 10 a.m. EDT. Minutes later, the Dow was up 125 points.

The Fed has said it plans to continue its $85 billion-a-month in Treasury and mortgage bond purchases until the job market improves substantially. And after its April 30-May 1 meeting, the Fed said it could increase or decrease the pace depending on how the job market and inflation fare.

Investors have been closely scrutinizing policymakers' comments since then for clues about the pace of the bond purchases.

Bernanke has had solid support for the bond purchases among the voting members of the Fed's interest-rate setting committee. At each of the Fed's three policy meetings this year, the committee has approved the purchases 11-1.

In recent months, the job market and the broader economy have shown renewed vigor. The economy has added an average of 208,000 jobs a month since November. That's up from only 138,000 a month in the previous six months.

The economy has benefited from a resurgent housing market, rising consumer confidence and the Fed's stimulus actions, which have helped ignite a stock market rally. The Standard & Poor's 500 (^GSPC) stock index has jumped 17 percent this year to a record high. Higher stock prices tend to make many people feel wealthier and more inclined to spend.

Those gains, in part, are why critics of the bond purchases, including some Fed regional bank presidents, have questioned the need to continue them at their current pace. They argue that keeping interest rates too low for too long could send inflation surging or inflate dangerous bubbles in assets such as stocks or real estate. Such a bubble could burst with the same destabilizing effects that the housing bust caused.