Tags: US | Bernanke | Exit | Strategy

Bernanke: Record-Low Rates Needed to Aid Economy

Thursday, 25 Mar 2010 01:28 PM

 

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Record-low interest rates are still needed to rev up the economic recovery, Federal Reserve Chairman Ben Bernanke told Congress on Thursday.

Bernanke, in testimony to the House Financial Services Committee, essentially repeated the rationale behind the Fed's decision last week to hold rates near zero. He cited still-fragile economic conditions, and noted that inflation is low, which gives the Fed leeway to keep rates at rock-bottom levels.

The Fed chief didn't offer new clues about when the central bank might reverse course and start tightening credit. He said that would need to happen when the "expansion matures." Some investors and analysts think higher rates could come in the fall.

Deciding when to tighten credit is the biggest challenge facing Bernanke, whose second term started in February. Moving too soon could short-circuit the recovery. Waiting too long could unleash inflation and sow the seeds for new speculative bubbles in stocks or commodities or other assets.

One of the reasons the Fed is holding rates so low is because of stubbornly high unemployment, Bernanke said. It's now at 9.7 percent, a potential restraining force on the economy's rebound.

Bernanke said the Fed "will not be able to wait until things are completely back to normal" before it starts to boost rates. But the Fed wants to make sure that the economy is on a sustainable growth path and that jobs are being created, he said.

The Fed also wants to see more lending by banks before it starts tightening credit, Bernanke said.

"The key point ... is that the Fed is no closer to implementing its exit strategy," said Paul Dales, an economist at Capital Economics. Bernanke's remarks suggest "he is in no hurry" to raise rates, Dales said.

On Wall Street, the Dow Jones industrial average was up nearly 100 points — and broader markets also rose — after a report showed that fewer Americans filed initial jobless claims than economists expected.

The Fed kept a pledge last week to hold rates at record lows for an "extended period," a decision that drew one dissent.

Bernanke said the term "extended period" isn't a fixed number of months. Rather, it is tied to how economic conditions evolve. If the economy were to rebound more strongly than anticipated, then the Fed would "respond appropriately" and start raising rates, Bernanke explained.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, however, expressed concern that keeping rates at record lows could cause a buildup of "financial imbalances" and put the economy's stability at risk. Analysts took that to mean low rates could spur a new speculative bubble later on that could burst and hurt the economy.

A housing boom that went bust thrust the country into the worst economic and financial crises since the 1930s.

In other observations, Bernanke said the housing market is "still quite weak."

Nonetheless, the Fed is on track to shut down a $1.25 trillion mortgage-securities-buying program at the end of this month. The program has lowered mortgage rates and bolstered the housing market.

Bernanke said the Fed will monitor closely how mortgages rates react after the program ends. The Fed could revive the program if the economy weakens.

The Fed chief also welcomed a new Bank of America program that aims to reduce record-high foreclosures by erasing debt of some of its most-troubled borrowers. He said he hopes other banks will follow suit.

Rep. Barney Frank, D-Mass., chairman of the panel, acknowledged the delicate job ahead for Fed policymakers as they remove supports and tighten credit.

"They are aware of the need to undo this in a way that is protective of the taxpayers, but also is not going to damage the economy," Frank said.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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