Federal Reserve Chairman Ben Bernanke.Susan Walsh/The Associated Press
Federal Reserve Chairman Ben Bernanke called improvement in the labour market over the past 14 months "meaningful," a comment that could bolster expectations that the Fed will curb its extraordinary bond-buying program sooner rather than later.
Mr. Bernanke was clear that any decision to slow the pace of its purchases – a strategy called quantitative easing, or QE – will depend on incoming data supporting the Fed's expectations of stronger hiring and inflation ending its drift away from the central bank's target of 2 per cent.
"If these views are supported by incoming information, the [Fed's policy committee] will likely to begin to moderate the pace of purchases," Mr. Bernanke said in prepared remarks for a dinner hosted by the National Economists Club. "However, asset purchases are not on a preset course, and the committee's decisions about their pace will remain contingent on the committee's economic outlook."
The Fed deployed its third round of QE in September 2012, pledging to create $85-billion (U.S.) a month to buy longer term Treasury debt and mortgage-backed securities. The program is controversial because theoretically the creation of money on such a scale could cause rapid inflation and inflate asset-price bubbles. There has so far been no evidence of the former, and inconclusive evidence of the later.
Still, there is pressure to ease up on QE because its relative novelty make its ultimate effects unknown. The consensus on Wall Street is the Fed will begin slowing purchases in March, although some analysts think January is a possibility. The Fed's policy committee next meets in December, and some Fed watchers acknowledge the central bank could surprise by tapering QE then.
Whenever the Fed chooses to slow its bond purchases, Mr. Bernanke was emphatic that the Fed would keep interest extremely low for a considerable time – probably years. The Fed's benchmark interest rate is at zero, and policy makers have pledged to keep it there at least until the unemployment rate drops to 6.5 per cent, so long as inflation remains tame.
"The target rate for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed and at least until the preponderance of the data supports the beginning of the removal of policy accommodation," Mr. Bernanke said.