Bernanke backs QE2 policy as helping weak economic recovery
Rising consumer and business confidence coupled with the Federal Reserve's accommodative monetary policy and improving credit conditions point to a more rapid pace of economic recovery in 2011, the Fed Chairman Ben Bernanke told the Senate Banking Committee Tuesday. The housing market remains exceptionally weak, though, Bernanke said, as the number of vacant and foreclosed homes continue to weight heavily on prices while sales and construction are still depressed. In his biannual report to Congress, Bernanke said the Fed's policy of reinvesting proceeds of maturing securities into longer-term Treasurys "appears to have contributed to an improvement in financial conditions and a strengthening of the recovery." He said the policy lowers term premiums and puts downward pressure directly on longer-term interest rates. "By easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy," Bernanke told Congress. Opponents have said the so-called quantitative easing, or QE2, will lead to inflation, but overall it's stayed relatively low. And Bernanke said the Fed anticipates inflation of about 1.25% to 1.75% this year and 1% to 2% in 2012. He said concerns about the Middle East and North Africa have pushed gas and oil prices up, increasing fears that commodity prices will move even higher. Still, he said the FOMC "remains unwaveringly committed to price stability and, in particular, to achieving a rate of inflation in the medium term" consistent with its mandate. "Commodity prices have risen significantly in terms of all major currencies, suggesting that changes in the foreign exchange value of the dollar are unlikely to have been an important driver of the increases seen in recent months," he said. "Don't expect the Fed to tighten policy in response to the spike in oil prices, officials are more concerned about the potential impact on real growth," analysts at Toronto-based Capital Economics said. The Fed chairman said members of the Federal Open Market Committee are beginning to feel optimistic about the jobs situation because of declines in the unemployment rate the past few months. But the FOMC still expects the rate to hover around 7.5% to 8% until the end of 2012. Bernanke said the Fed continues to project real GDP growth of 3.5% to 4% this year. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said. Capital Economics said Bernanke's testimony offered "no hint that he favors ending QE2 early," and they still expect the Fed to see it through to the end. Write to Jason Philyaw.