"Steady as she goes" was the clear, if implicit, message Federal Reserve Chairman Ben Bernanke gave to Congress on Tuesday.
As Wall Street begins to question if the central bank will scale back its monetary stimulus later this year, Bernanke gave every sign that asset purchases will continue unabated.
"The proposed 'review' of asset purchases scheduled for the March meeting will likely be a non-event," wrote IHS Global Insight economist Paul Edelstein.
The research firm expects the Fed to continue its purchases of Treasuries and mortgage-backed securities into 2014.
Despite a recent pickup in gas prices, Bernanke noted that overall inflation has remained low, giving the Fed plenty of room to act. Meanwhile, "the job market remains generally weak," with 4.7 million jobless for more than six months and millions more only able to find part-time work.
Fed Push, Fiscal Drag
Bernanke also highlighted the economic drag from Washington via the January fiscal-cliff tax hike of nearly $200 billion in 2013 and the sequester spending cuts that are set to kick in March 1.
Citing Congressional Budget Office estimates, he said those policies could reduce GDP growth by 1.5 percentage points, with the bigger hit from tax hikes.
He said he would prefer the upcoming sequester be altered so that smaller spending cuts would hit now and bigger deficit cuts would come later targeting entitlement programs.
Sen. Pat Toomey, R-Pa., warned against postponing the sequester based on promises of future cuts. "I think the credibility of those promises would be worth zero.
The sequester is expected to reduce outlays by $44 billion through Sept. 30, the end of fiscal 2013, CBO has said.
The Fed has given only vague guidance that asset buys will continue until there is "substantial improvement" in the job market.
The jobless rate, now 7.9%, wouldn't even fall below 7.5% until early 2015, the CBO recently projected, based on current-law fiscal policies.
At the same time, CBO projects that the Fed's earnings on its portfolio of Treasuries and MBSs will boost government revenue by $110 billion in 2015, up from $82 billion last year and around $20 billion before the financial crisis.
This suggests that how well the economy responds to the just-passed tax hikes and future spending cuts will play a big role in the timing of the Fed's exit.
Yet fiscal policy "could ultimately lead to asset purchases being maintained at the current pace longer than otherwise would have been the case," despite increased QE debate within the Fed, Barclays economist Peter Newland wrote.
Minutes from the central bank's January meeting released last week noted a concern among some participants that "further asset purchases could foster market behavior that could undermine financial stability.
Bernanke downplayed the concern by noting that the banking sector is in much better shape to handle any speculative bubbles.
He also said the benefits of quantitative easing still outweigh the risks.
"Keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods," he said.
January new-home sales rose 16% to a four-year annualized high of 437,000, the Commerce Department said Tuesday.