The Federal Reserve remained committed to highly accommodative monetary policy despite having trimmed its bond-buying stimulus programme, Ben Bernanke said on Friday in what could be his last speech as Fed chairman.
Mr Bernanke, who is set to be succeeded by his deputy Janet Yellen as head of the US central bank at the end of this month, gave an upbeat assessment of the economy in coming quarters. But he tempered the good news in housing, finance and fiscal policy by repeating that the overall recovery “clearly remains incomplete”.
Coming as a surprise to some, the Fed decided last month to cut its bond-buying programme, known as quantitative easing or QE, by $10bn (£6bn) to $75bn a month. It cited a stronger job market and economic growth in its decision, which amounted to the beginning of the end of the largest monetary policy experiment ever.
But that decision “did not indicate any diminution of [the Fed’s] commitment to maintain a highly accommodative monetary policy for as long as needed,” Mr Bernanke told the American Economic Association.
“Rather, it reflected the progress we have made toward our goal of substantial improvement in the labour market outlook that we set out when we began the current purchase programme in September 2012,” he said.
To recover from the deep 2007-09 recession, the Fed has held interest rates near zero since late 2008. It also has quadrupled the size of its balance sheet to about $4 trillion through three huge rounds of government bond purchases – effectively injecting new money into the economy – aimed at holding down longer-term borrowing costs.
The Fed’s extraordinary money-printing has helped drive stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets last year as investors moved funds in anticipation of an end to the easing.
Mr Bernanke said the Fed had other tools – including adjusting the interest rate on excess bank reserves and so-called reverse repurchase agreements, or repos – to return to a normal policy stance without resorting to asset sales.
“It is possible, however, that some specific aspects of the Federal Reserve’s operating framework will change,” he said.
“The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for US economic growth in coming quarters.”
But he added: “Of course, if the experience of the past few years teaches us anything, it is that we should be cautious in our forecasts.”