The Federal Reserve's stimulus is working, and more of it is on the way.
That was the message from Federal Reserve Chairman Ben Bernanke in a Tuesday night speech. In one of his final addresses as Fed Chairman, Bernanke told a meeting of the National Economists' Club that quantitative easing will only end once it has reached its full potential, and that near-zero interest rates may be here for a while.
"In particular, even after unemployment drops below 6 1/2 percent, and so long as inflation remains well behaved, the committee can be patient in seeking assurance that the labor market is sufficiently strong before considering any increase in its target for the federal funds rate," he said.
That indicates that interest rates could maintain their uber-low levels for longer than current Fed guidance might seem to indicate at first blush. Currently, the Federal Open Market Committee, the Fed committee that sets interest rates, says that it would likely begin considering raising interest rates if unemployment fell below 6.5 percent and inflation approaches 2.5 percent. Currently, the jobless rate is at 7.3 percent, and the annualized inflation rate is at around 1 percent. Bernanke stressed that the Fed's stated figures are thresholds, not triggers for policy action.
In addition, Bernanke reiterated that the Fed would eventually normalize policy, dialing back its current easing program of $85 billion in monthly asset purchases known as QE3 … but only after it does everything in its power to boost the economy.
"I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery," he said.
QE3 began in September 2012, and since then, markets have been closely listening to Bernanke's every word, wondering when the central bank might taper its monthly purchases. In June, when Bernanke suggested tapering might begin this year, the Dow lost more than 300 points in one day and interest rates spiked. Bernanke took the opportunity Wednesday to chide markets for what he considers to be an overreaction.
The spike in interest rates was "neither welcome nor warranted, in the judgment of the FOMC," he said.
In addition, Bernanke defended the Fed's current stimulus program against the perception that it helps the rich by boosting their assets' values while doing little for average Americans. Asked about whether the Fed helps Wall Street at the expense of Main Street, the central banker was emphatic.
"It's simply not true," he responded, saying that easing and low interest rates are aimed at boosting employment and stimulating economic growth – and they have had some success.
Bernanke added that the Fed has been working to boost the economy, while Congress has meanwhile experienced constant gridlock on fiscal issues.
"While it would be better to have an even broader-based effort in Washington, the Fed is making an important contribution to middle class and lower-income folks' welfare."