Monetary stimulus from the US central bank is helping the country’s economy recover, but the head of the Federal Reserve Ben Bernanke has said policymakers will need to see further signs of improvement before easing off on that stimulus.
He told the Joint Economic Committee of the US Congress: “Economic growth in the first quarter was supported by continuing expansion and demand by US households and businesses, which more than offset the drag from declines in government spending – especially defence spending. Despite this improvement the job market remains weak overall, the unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labour force participation rate had continued to move down.”
The central bank is currently pumping 85 billion dollars into the economy each month by buying Treasury and mortgage bonds.
That is to keep borrowing costs low and encourage investment, hiring and economic growth.
Bernanke said it is working, with consumer spending rising on things like cars and housing, but more is needed.
No inflation pressure
The Fed chairman noted that the main inflation gauge the Fed monitors rose just 1.0 percent in the 12 months through to March, just half the central bank’s 2.0 percent target.
Part of the reason, he said, was a decline in energy prices. But there were also indications of more broad-based disinflation, Bernanke said.
Bernanke reiterated that the Fed was prepared to either increase or reduce the pace of its bond buys depending on economic conditions, as the central bank stated on May 1 after its last policy meeting.
Bernanke said some headwinds facing the economy, including the debt crisis in Europe, have been dissipating. But he said a sharp tightening of the US government’s budget had become too big of a drag on growth for the central bank to fully offset.
He told the committee the Fed was aware of the risk that keeping monetary policy too easy for too long could fuel asset price bubbles. However, he said the central bank believed major assets prices were justified by the economy’s fundamentals.
Further, he warned of the risks to pulling back on stimulus too early. “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said.
US economic growth rose to a 2.5 percent annual rate in the first quarter following an anemic end to 2012. Unemployment has fallen to 7.5 percent from a peak of 10 percent.
Recent economic data have been mixed.