WASHINGTON — Ben Bernanke’s sway over financial markets has been on full display in recent weeks. When the Federal Reserve chairman speaks Wednesday to Congress, investors will once again parse each word for any subtle shift in the Fed’s stance on interest rates.
Bernanke has sent financial markets plunging and surging the past two months, depending on whether he was seen as loosening or affirming the Fed’s commitment to ultra-low interest rates. Low rates have fueled home sales, encouraged borrowing and spending, lifted stock prices and helped support economic growth.
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.
The chairman’s two days of testimony begin Wednesday before the House Financial Services Committee. Bernanke is expected to be pressed about the state of the economy and his future at the Fed after his second four-year term as chairman ends in January. But financial markets will be most glued to Bernanke’s comments about the Fed’s likely timetable for slowing its bond buying.
His recent public remarks have baffled investors.
After the Fed’s last meeting June 18-19, Bernanke sketched a rough timetable for the Fed’s bond purchases: He said that if the Fed’s expectations for moderate economic growth and a gradually stronger job market prove accurate, it could start scaling back its bond buying later this year and end it around mid-2014. Bernanke said he thought the unemployment rate would then be about 7 percent. It’s now 7.6 percent.
Bernanke’s comments were generally in line with what economists had been expecting. Yet his words sent stocks plunging. 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. And the yield on the 10-year Treasury note fell as investors bought bonds.
At the 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.
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. 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.
The June jobs report showed employers added 195,000 jobs last month and 70,000 more in April and May than it had previously forecast.
Still, unemployment remains high 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.
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