With only a few more public appearances left as chairman of the Federal Reserve, Ben Bernanke is trying to ensure that the stimulus he’s put in place comes to a smooth finish, whether on his watch or his successor's.
The central banker attempted Tuesday night to explain that slowly winding down the Fed's quantitative easing program – the $85 billion monthly bond purchases he initiated late last year – will not constitute a tightening of the money supply.
Once quantitative easing has been phased out, Bernanke said, the Fed will continue to maintain its stimulus efforts "for as long as they are needed” by promising to keep interest rates near zero, where they have been since late 2008.
Speaking at an event at the Chamber of Commerce in Washington, the outgoing chairman clarified that the economy is not yet strong enough to return monetary policy to normal – “we are still far from where we would like to be,” Bernanke said.
For that reason, Bernanke cautioned that it will require more reassuring incoming economic data for the Fed to “taper” the size of its bond purchases. When that time does come, Bernanke said, “it will likely be because the economy has progressed sufficiently for the [Federal Open Market] Committee to rely more heavily on its rate policies" and "the associated forward guidance” that those rates will not be raised until at least 2015.
In the past, Bernanke has struggled to convince markets that a move to taper the asset purchases does not entail that the Fed is also planning to raise rates sooner. "The markets tended to conflate those two tools" earlier in the year, Bernanke said in a question-and-answer session following the speech.
He also acknowledged that fact in his speech, noting that bond markets priced in earlier rate hikes (and the stock market fell sharply) when in June he suggested that the taper was coming sometime in the fall.
That market reaction “was neither welcome nor warranted,” Bernanke said. The “change in expectations did not correspond to any actual lessening” to the Fed’s commitment to providing stimulus through near-zero rates.
Something similar happened in September when the Fed then didn’t reduce the size of the bond purchases as expected – investors pushed the expected date for the first rate hikes out further into the future. That shouldn't have happened if markets clearly understood the Fed, according to Bernanke.
Bernanke seems determined not to let similar confusion take hold when the Fed does move to taper the asset purchases, whether that takes place on his watch or under the chairmanship of his successor. Current Fed Vice Chair Janet Yellen has been nominated for the job.
“In short, for monetary policy, expectations matter,” Bernanke said, signaling that forward guidance can serve as a substitute for asset purchases.
In the past, Bernanke has referred to relying on forward guidance rather than quantitative easing as a shift in the "mix of tools" used, but not in the thrust of monetary policy.
Since December of last year, the Fed has stated that it will keep rates at zero at least until unemployment falls to 6.5 percent. Bernanke said that even after unemployment crosses that threshold, rates might remain at zero for a significant period of time if inflation is still low. The Fed “can be patient in seeking assurance that the labor market is sufficiently strong before considering any increase in its target for the federal funds rate,” Bernanke said.