After multiple weeks of speculation about the Federal Reserve’s plans for further stimulus, Chairman Ben Bernanke sounded dovish notes Wednesday, hinting that the central bank will keep interest rates near zero for long after it ends its large-scale bond purchases.
Bernanke, speaking at a National Bureau of Economics Research meeting in Boston, defended the Fed’s decision last month to give the public a rough timeline for winding down the $85 billion in bond purchases, but stressed that the Fed would keep interest rates near zero long after it stopped adding assets to its balance sheet.
In recent statements, the Fed has indicated it will keep the federal funds rate close to zero until unemployment is below at least 6.5 percent. Bernanke said Wednesday that it would likely be well after the 6.5 percent threshold is crossed that rates rise.
Both sides of the Fed’s dual mandate to promote full employment and keep prices stable “are saying that we need to be more accommodating,” Bernanke said. He noted that the current unemployment rate, “if anything, overstates the health of our labor market,” because of the number of workers who have dropped out of the labor market completely or have settled for part-time work.
Bernanke also promised to act if inflation fell too low, stating that “we’re very much committed to defending our inflation target from below as well as from above.” Inflation was running at 1.4 percent in May, according to the Consumer Price Index. By the Fed’s preferred metric, it’s below 1.1 percent.
William Dudley, the president of the New York Fed, has also suggested that interest rates could remain near zero beyond the 6.5 percent unemployment threshold.
Bernanke said that the “overall message is accommodation,” regardless of the specific tools the Fed uses to keep money loose. He warned that tightening financial conditions and the sequestration budget cuts could slow down any further recovery.
Bernanke made his comments during a question-and-answer session following a speech on the history of the Federal Reserve. In his address, Bernanke highlighted the need for the central bank to refocus on its original mission, namely financial regulation. The Fed chairman called the role of regulating the banking sector “coequal” with managing monetary policy, and said “we have come full circle, back to the original goal of the Federal Reserve of preventing financial panics.”