Bernanke says Federal Reserve is ‘focused on Main Street’
WASHINGTON — The Federal Reserve’s efforts to explain how its unprecedented economic stimulus will be phased out might rattle Wall Street, but Chairman Ben S. Bernanke said the aim is clear — avoiding a severe market reaction that would hurt home and auto buyers.
“We’re very focused on Main Street. We’re trying to create jobs. We’re trying to make housing affordable,” Bernanke told lawmakers Wednesday in what might have been his last testimony before a House committee.
Trying to calm jittery financial markets and skeptical lawmakers, Bernanke assured members of the House Financial Services Committee that there was no “preset course” to ending the central bank’s bond-buying program.
The Fed intends to begin scaling back $85 billion in monthly purchases “in measured steps” later this year, but the plan could be delayed if the economic recovery falters, he said.
Several Republicans criticized the Fed’s easy-money policies since the Great Recession. But Bernanke defended the central bank’s actions, saying they have been focused on helping average Americans.
With stock markets and corporate profits hitting record levels but unemployment still high and mortgage rates rising, Bernanke was asked whether Wall Street has benefited more from Fed policies than Main Street.
“Our goals are Main Street,” he said.
The biggest impact of monetary policy, he said, is on interest rates for home and auto loans, and “those are two of the areas right now which are leading our recovery.”
Republicans and Democrats said they were concerned about the recent jump in mortgage rates as financial markets have begun anticipating the end of the Fed’s bond-buying program.
The average rate for a 30-year fixed-rate loan rose to 4.51% from last fall’s record low of 3.31%, according to the latest data from mortgage financing giant Freddie Mac.
Rep. Earl Perlmutter (D-Colo.) said that rebounding home sales and housing prices have been a major factor in the economic recovery.
“But this kind of increase, if it continues, is going to slow that down, wouldn’t you agree?” he asked Bernanke.
“I agree that we need accommodative monetary policy for the foreseeable future,” Bernanke said.
Bernanke noted that he has made the point before that the Fed would not pull back all its stimulus until the economy recovers much further.
But he acknowledged that some confusion has cropped up as Fed officials have tried to explain their plans for ending the stimulus policies, which also include near-zero short-term interest rates.
Committee Chairman Jeb Hensarling (R-Texas) criticized the Fed’s recent communications efforts. Those included Bernanke’s testimony in May before another congressional committee that triggered a 250-point swing in the Dow Jones industrial average of 30 major stocks.
“Recent panicked responses by financial markets to monetary policy communications and observations from a range of economists suggest the Federal Reserve’s forward guidance clearly needs some improvement,” Hensarling said at the start of Wednesday’s hearing.
Bernanke has been refining his message since the May appearance.
He has tried to draw a clear distinction between slowing the bond purchases, which would end when the unemployment rate was about 7%, and keeping short-term interest rates near zero until the unemployment rate falls to at least 6.5%, which isn’t expected to happen until sometime in 2015.
The jobless rate was 7.6% in June.
Diane Swonk, chief economist at Mesirow Financial, said those dueling levels were confusing.
“It gets complicated when you start putting those numbers in,” she said.
Bernanke’s clear statement Wednesday that there was no “preset course” for ending the bond purchases helped clarify the situation, Swonk said.
Investors didn’t show much reaction to Bernanke’s comments. The Dow traded in a roughly 50-point range, gaining 18.67 points, or 0.12%, to 15,470.52.
Gregory Daco, senior economist at IHS Global Insight, said Bernanke succeeded in clarifying Fed policy.
“This particular exercise was heavily focused on the fact that future Fed decisions [on stimulus] would be conditional on economic data,” Daco said. “I think he convinced me.”
Bernanke said communicating Fed policy was challenging. But failing to give some advance indication of the Fed’s plans risked financial markets moving in the wrong direction, he said, noting that it could cause a severe reaction when the Fed began scaling back its stimulus.
The recent market swings based on Fed statements showed how volatile the situation is, he said.
“I think it’s been very important that we communicate as best we can what our plans and our thinking is,” he said. “I think the markets are beginning to understand our message and that the volatility has obviously moderated.”
He acknowledged that having numerous Fed officials expressing their opinions could muddle the message.
“There’s a lot of different views, and I think there’s a benefit to having a lot of different views,” Bernanke said. “On the other hand, if people are looking for a single signal, it can be a little confusing.”
Bernanke said he thought the Fed was “doing a reasonable job of communicating our intentions and our plans in the context of a complex monetary policy strategy.”
Lawmakers noted the hearing could have been Bernanke’s last appearance before the committee as Fed chairman. His second four-year term ends in January, and he’s not expected to seek a third term.
Members of both parties thanked Bernanke for his service.
Rep. Emanuel Cleaver (D-Mo.), a former pastor in the United Methodist church, noted all the compliments paid to Bernanke and joked: “In my business, it’s called a eulogy.”
Must-read stories from the L.A. Times
Get the day's top news with our Today's Headlines newsletter, sent every weekday morning.
You may occasionally receive promotional content from the Los Angeles Times.