Lawmakers likely to press Bernanke on Fed stimulus

Bernanke likely to face tough questions from lawmakers on Fed's plan for bond purchases

Associated Press
Bernanke: Timetable for bond purchases not preset
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FILE - In this Wednesday, May 22, 2013, file photo, Federal Reserve Chairman Ben Bernanke listens as he testifies on Capitol Hill in Washington, before a Senate Joint Economic Committee hearing on "The Economic Outlook." Bernanke is expected to face tough questions Wednesday, July 17, 2013, from U.S. lawmakers about when the Federal Reserve might start to scale back its low interest rate policies that have helped support economic growth. The Fed chairman will also be pressed on the state of the economy and his future at the Fed after his second four-year term as chairman ends in January. (AP Photo/Manuel Balce Ceneta, File)

WASHINGTON (AP) -- Ben Bernanke is expected to face tough questions Wednesday from U.S. lawmakers about when the Federal Reserve might start to scale back its low interest rate policies that have helped support economic growth.

The Fed chairman will also be pressed on the state of the economy and his future at the Fed after his second four-year term as chairman ends in January. And he may even criticize Congress for federal spending cuts and tax increases that have weighed on the economy this year.

But investors will focus on Bernanke's comments about the Fed's potential timetable for slowing its bond buying.

Bernanke's two days of testimony begin Wednesday before the House Financial Services Committee. On Thursday he goes before the Senate Banking Committee.

Since the financial crisis erupted in 2008, the Fed has kept its benchmark short-term interest rate near zero. And since late last year, it's been buying $85 billion a month in mortgage and long-term Treasury bonds to try to reduce long-term rates and induce people and businesses to borrow and spend.

Financial markets began to gyrate after then Fed's June 18-19 meeting. That's when Bernanke sketched a rough timetable for the Fed's bond purchases. He said the Fed could start scaling back its bond buying later this year and end it around mid-2014 if the economy strengthens enough to be in line with the Fed's more optimistic forecast.

Stocks plunged, even though Bernanke's comments were generally in line with what economists had been expecting. The Dow Jones industrial average sank 560 points in two days. Investors feared Bernanke's comments meant the Fed was ready to let rates rise sooner and faster than they'd expected.

Since then, the chairman and other Fed officials have sought to calm investors. They've stressed that the Fed won't pull back on its stimulus unless the evidence was clear that the economy and the job market were improving as much as the Fed had forecast. If not, the Fed would keep its support intact. It might even increase its stimulus it felt the economy needed more support.

The stock market gradually recovered. And when Bernanke reinforced his go-slow message at a conference last week near Boston, the stock market celebrated. The Dow and the Standard & Poor's 500 stock index reached all-time highs.

The yield on the 10-year Treasury, a benchmark for mortgages and other long-term interest rates, also fell as investors bought bonds. It was at 2.54 percent on Tuesday after surging as high as 2.74 percent on July 5. That's still well above the 1.63 percent reached on May 3.

At last week's conference, Bernanke said unemployment was still too high and noted that inflation remains below the Fed's 2 percent target — both reasons to keep low rate policies in place. He said the economy was also being held back by higher federal taxes and budget cuts.

"If you put all of that together," Bernanke said, "you can only conclude that highly accommodative monetary policy for the foreseeable future is what is needed for the U.S. economy."

The chairman signaled that even after the Fed starts to slow its monthly bond purchases, its overall policies will keep rates low. It plans, for example, to keep its investment holdings constant to avoid causing long-term rates to rise too fast. It also plans to keep short-term rates at record lows at least until unemployment reaches 6.5 percent. Unemployment is currently 7.6 percent.

And Bernanke has said 6.5 percent unemployment is a threshold, not a trigger. The Fed might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, expects Bernanke won't deviate from last week's message.

"I think Chairman Bernanke will try to calm the markets," Sohn said. "I think he will say that the Fed's exit strategy is totally dependent on future economic developments."

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, and economic growth has been modest the past three quarters.

The economy grew at a subpar 1.8 percent annual rate in the January-March quarter. Many economists think growth in the April-June quarter weakened to an annual rate of 1 percent or less. They foresee a moderate rebound in the second half of this year.

Bernanke may be delivering his last economic report to Congress. While he has not publicly announced his plans, it is widely thought that he does not want to remain for a third term as chairman.

Vice Chair Janet Yellen is considered the front-runner to replace Bernanke, but President Barack Obama has not tipped his hand yet about possible replacements.

Former Treasury Secretary Lawrence Summers, who served Obama in the first term as chairman of the National Economic Council, is also considered a potential candidate.

The expectation is that Obama will nominate a replacement in late summer or early fall so that the Senate will have time to hold confirmation hearings this year.

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