THE TAKEAWAY: Fed’s Bernanke defends record low rates and stimulus measures > Low rates to remain through mid-2015 even as economy strengthens > USDJPY mixed
Federal Reserve Chairman Ben Bernanke defended the bank’s policy for sustaining record low rates and accommodative stimulus measures, even U.S. economic recovery gains strength. At the last monetary policy meeting, the Fed announced that it will buy $40 billion of mortgage debt a month in a third round of quantitative easing, or QE3. Furthermore, the committee extended its horizon for maintaining its key interest rate near zero until at least mid-2015, although policy makers are not expecting the economy to remain weak through 2015.
In a speech in Indianapolis, Bernanke said that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens”. Although the U.S. economy is expected to continue to grow, the Fed remains concerned that the pace of growth will be insufficient to lower persistently elevated unemployment. The low rates are expected to help boost the labor market, as well as reduce the federal budget deficit by reducing the government’s borrowing costs.
On the price front, Bernanke stated that inflation is likely to stay low for the foreseeable future, reassuring that low interest rate policies “have not led to increased inflation” and that the Fed will have the necessary tools to tighten conditions and exit from stimulus when necessary to prevent “inflationary pressures down the road”.
USDJPY 1-minute Chart: October 1, 2012
Chart created using Market Scope – Prepared by Tzu-Wen Chen
Despite Bernanke’s dovish tone for monetary policy, the market reaction was rather muted as Bernanke’s speech was essentially a reiteration of the Fed’s current policy. Trading of the USDJPY pair was mixed, and at the time this report was written, was trading at 78.01 yen.
Key commentary from Bernanke’s speech are summarized as follows:
- Doesn't expect economy to be weak through 2015.
- Fed to keep rates low after economy strengthens.
- Reiterates 'monetary policy is no panacea'. Using policy to shape budget politics inappropriate.
- Fed 'will take care not to raise rates prematurely'.
- Federal budget needs to be on 'sustainable path'. QE will probably help reduce federal debt.
- Fed has tools to exit stimulus when necessary.
- Inflation probably to stay low for foreseeable future.
- Once into deflation, very, very hard to get out.
- 'Early aggressiveness' in policy is important.
- Lending standards still tight in some areas, and there are "still difficulties in credit markets".
- 'Very hard' to identify economy's turning points, but 'we see an economy which is expanding'.
- Expects economy to continue to grow, but Fed concerned pace of growth insufficient to cut unemployment.
- 'Price stability is critical'. Fed's record on inflation 'is good'.
- Fed's two mandates and strong economy will support value of dollar.
- Fiscal issues part of reason for slow growth.
- Housing was a 'major drag' on recovery, but we have 'begun to see improvement in housing'.
--- Written by Tzu-Wen Chen, DailyFX Research