UPDATED: Bernanke at Capitol Hill, attempts to calm markets

Federal Reserve Chairman Ben Bernanke is currently testifying at Capitol Hill.

Watch a live feed now at C-Span.

In recent reports, Associated Press says Bernanke has stated the Federal Reserve’s timetable for reducing its bond purchases is not on a preset course, and asserts the Fed could increase or decrease the amount based on how the economy performs.

According to his prepared monetary policy report, Bernanke is telling lawmakers in testimony today that the job market has made some progress since the Fed began buying $85 billion a month in bonds in September. And he repeated his belief that the Fed could slow that pace later this year if the economy strengthens.

But he also cautions the Fed wants to see substantial progress in the job market before scaling back the bond purchases. If conditions worsen, the Fed could maintain its current pace or even increase it. The bond purchases are intended to keep long-term interest rates low and encourage borrowing and spending.

His remarks, prepared for the House Financial Services Committee, largely represent a restatement of the views he and other Fed officials have been making in recent weeks to try and calm turbulent markets.

The Dow Jones industrial average plunged by 560 points in the two days after Bernanke’s initial comments at a news conference following the Fed’s mid-June meeting.

Since then, various Fed officials have tried to assure investors that the Fed’s timetable is based on economic performance rather than on a calendar date. That’s helped to restore investor confidence and the Dow and other market indicators have climbed to new highs.

Hiring has improved since the Fed’s bond buying began. Employers have created an average of 202,000 jobs a month this year, up from 180,000 in the previous six months.

Still, unemployment remains elevated at 7.6%, and economic growth has been modest the past three quarters.

In his testimony, Bernanke will state, “A highly accommodative monetary policy will remain appropriate for the foreseeable future” because unemployment remains high and inflation is below the Fed’s target of 2%.

Bernanke also repeats the Fed plans to keep its benchmark short-term interest rate near zero as long as unemployment is above 6.5%.

But he says the Fed could hold the rate lower even after it falls below 6.5%, particularly if unemployment falls because more people are leaving the workforce. The government counts people as unemployed only if they are actively looking for a job.

Bernanke adds the economy is growing at “moderate pace” despite the adverse effects of tax increases and federal spending cuts. He notes the housing market is rebounding and the job market has gradually improved.

The economy grew at a subpar 1.8% annual rate in the January-March quarter. Many economists think growth in the April-June quarter weakened to an annual rate of 1% or less. That would make the third straight quarter of a growth rate below 2%.

Many expect growth will rebound in the second half of this year.

The Fed forecasts that the economy will grow between 2.3% and 2.6% this year, which is more optimistic than many economists predict. The pickup in economic growth that Fed officials expect is based in part on an assumption that the adverse effects of the tax increases and government spending cuts will diminish over time. And it assumes that the overall risks to the economy are lower now than they were when the central bank began the latest bond-buying program.

But Bernanke says threats remain. The federal budget policies could restrain growth for longer than expected. Or a congressional battle later this year over raising the government’s borrowing limit could once again rattle investor and consumer confidence.

Prior to these reports and the release of the prepared statements, analysts said they were expecting QE tapering will still be in the cards, reports CNBC.

As the FOMC June meeting minutes revealed, “several members judged that a reduction in asset purchases would likely soon be warranted, in light of the cumulative decline in unemployment since [FOMC’s] September meeting,” among other factors.

Further, “Two…members…indicated the Committee should begin curtailing its purchases relatively soon in order to prevent the potential negative consequence of the program…exceeding its anticipated benefits.”

One thing’s for sure: Bernanke’s run as chairman is coming to an end, given his “second term expires at the end of January,” says the U.S. Committee on Financial Services in a letter about the hearing.

It adds, “Although his term as governor runs several more years, it would be…unusual for him to remain on the board after his term expired.” He’d have to be nominated once more, and it’s “widely assumed” he doesn’t want to resume his post.

Read:

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