Bernanke Doesn’t Rule Out More Bond Buying to Aid Economy

By Scott Lanman and Joshua Zumbrun - Mar 2, 2011 9:13 AM PT
BLOOMBERG

Federal Reserve Chairman Ben S. Bernanke didn’t rule out expanding the central bank’s asset purchases aimed at stimulating the economy, saying he doesn’t want to see the nation relapse into a recession.

Asked at a House Financial Services Committee hearing today what conditions would warrant a third round of so-called quantitative easing, Bernanke said that “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”

Bernanke’s testimony today and yesterday signaled that he will keep the Fed on course to complete $600 billion of Treasury purchases through June under the second round of quantitative easing, a policy criticized by Republican lawmakers as risking an inflation surge. He’s avoided saying what the central bank may do after that.

A third round of purchases “has to be a decision” of the Federal Open Market Committee, and “it depends again on our mandate” for stable prices and maximum employment, Bernanke said in response to Texas Representative Jeb Hensarling, the House panel’s vice chairman and a critic of QE2.

“We’re looking very closely at inflation both in terms of too low and too high,” Bernanke said during the second day of semiannual testimony on monetary policy. “I want to be sure that you understand that I am very attentive to inflation and potential risks for inflation. That will certainly be a major consideration as we look to determine how to manage this policy.”

Stocks Erase Gains

Stocks erased gains as oil resumed its advance, rallying above $102 a barrel. The Standard & Poor’s 500 Index fell 0.2 percent to 1,303.67 at 12:04 p.m. in New York after climbing 0.6 percent earlier.

Treasuries declined after a report showed the pace of employment growth is picking up before the Labor Department issues February jobs data March 4. The yield on the 10-year Treasury note rose to 3.41 percent from 3.39 percent yesterday.

Responding to a question from Representative Nydia Velazquez, a New York Democrat, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.”

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” he said.

Second Round

The second round of bond buying follows a $1.7 trillion first round of purchases of mortgage-backed debt and Treasuries.

Since August, when Bernanke signaled the Fed might buy securities to stimulate the economy, “downside risks to the recovery have receded, and the risk of deflation has become negligible,” he said in testimony this week.

Last week, the Commerce Department reduced its estimate of fourth-quarter growth to a 2.8 percent annual pace. Consumer purchases rose at a 4.1 percent pace, the most since the same three months in 2006, compared with a 4.4 percent rate originally estimated.

Inflation is likely to remain low through 2013, Bernanke, 57, a former Princeton University economist, said in Senate testimony yesterday.

“We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability,” he said.

Labor Market

At the same time, the labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” he said. “The housing sector remains exceptionally weak,” and “slow wage growth” is keeping labor costs in check, he said.

A report yesterday showed U.S. manufacturing accelerated in February to the fastest pace since May 2004. The Tempe, Arizona- based Institute for Supply Management’s factory index increased to 61.4 from 60.8 a month earlier. Readings greater than 50 signal growth.

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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