Federal Reserve chief shows no signs of ending stimulus policy
US Federal Reserve Bank Chairman, Ben Bernanke, seems to be sticking to his monetary policy as he showed no signs of the Fed ending its bullion-friendly bond buying program any time soon, as his opening statement reads.
The document, released to the media a couple of hours ahead of his testimony in front of Congress, indicates the Fed’s monetary stimulus is helping the U.S. economy recover, as the high costs of unemployment and inflation continue to run below the central bank’s target.
“Monetary policy is providing significant benefits,” Bernanke says in his testimony, reiterating that the Fed was prepared to either increase or reduce the pace of its bond buys based on economic conditions.
“In particular,” he says, “the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.”
Gold investors reacted positevely to the news, with the precious metal extending earlier gains after Bernanke’s opening remarks. This, as concerns the bank would soon reduce its bond-buying scheme dropped, while Chinese physical demand lent support to prices.
Bernanke adds the Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.
However he hints that savers will be in a better position if low rates stay in place for now.
While the Fed policymaking committee “actively seeks economic conditions consistent with sustainably higher interest rates,” Bernanke says, “withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions.”
He warns that a premature tightening of monetary policy could lead interest rates to rise temporarily, but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.
The outcome, he believes, would extend the period of low interest rates and generate “poor returns on other assets.”