Ben Bernanke has reassured the markets that the Federal Reserve’s bond-buying programme is not on a “preset course” but that its path depends on the wider economic picture.
The Fed chairman sparked panic in the markets at the end of May, when he said the central bank could consider slowing the pace of its $85bn-a-month quantitative easing programme later in the year.
In a testimony before Congress today, Bernanke said the scale of the Fed’s bond-buying could be reduced or expanded by as much as the prevailing economic conditions in the US warrant.
“On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly,” the chairman said.
“On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions – which have tightened recently – were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.
“Indeed, if needed, the committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.”
Financial markets were watching Bernanke’s testimony closely for any indication of the central bank’s plans for QE. Although it reiterated that the programme could slow later this year, he also stressed that “highly accommodative monetary policy will remain appropriate for the foreseeable future” and will only be tapered if the US economy is suitable strong enough.
In the US, stockmarkets rose in early trades while the FTSE 100 and other European stockmarkets were ahead after the publication of Bernanke’s speech.
Capital Economics senior US economist Paul Dales comments: “It’s interesting that Bernanke did not draw attention to the contrast between the stronger news on employment and weaker news on GDP growth, which could be important as tapering is ‘by no means on a preset course’.
“But as the Fed still expects growth to accelerate, this is unlikely to alter the tapering timetable much.”