The economy is on sturdier footing than a year ago, but Ben Bernanke, chairman of the Federal Reserve, is trying to avoid squashing the current recovery.
The Federal Open Market Committee has made it clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation fluctuates.
Nonetheless, “Withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. 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,” Bernanke explained.
The Fed remains committed to its current quantitative easing program, in which the central bank purchases $85 billion a month in Treasurys and mortgage-backed securities.
The policy is intended to reduce long-term interest rates, which — in turn — stimulates the economy.
Notably, the housing market has strengthened over the past year, supported by low mortgage rates and improved sentiment on the part of potential buyers.
“Increased housing activity is fostering job creation in construction and related industries, such as real estate brokerage and home furnishings, while higher home prices are bolstering household finances, which helps support the growth of private consumption,” the Fed chairman said.
However, the immediate concern Bernanke has is easing the Fed’s foot off the gas pedal, considering the economy is on the right track for recovery.
Thus, the Federal Reserve is closely watching for indications of financial instability, including signs that low interest rates may spur investors or portfolio mangers to reach for yield by taking on more risk, duration risk or leverage.
Continued unabated #QE adds further impetus to rally in risk assets.
— Joseph A. LaVorgna (@Lavorgnanomics) May 22, 2013
“Because only a healthy economy can deliver sustainably high real rates of return to savers and investors, the best way to achieve higher returns in the medium term and beyond is for the Federal Reserve — consistent with its congressional mandate — to provide policy accommodation as needed to foster maximum employment and price stability,” Bernanke explained.
He concluded, “Of course, we will do so with due regard for the efficacy and costs of our policy actions and in a way that is responsive to the evolution of the economic outlook.”