Bernanke testimony to be studied for policy clues

[May 22, 2013]  WASHINGTON (AP) -- When Ben Bernanke testifies about the U.S. economy Wednesday, the Federal Reserve chairman's words will be examined for any clues that the Fed might soon taper -- or increase -- its support for the economy.

The Fed is pursuing an aggressive program of bond purchases to try to keep long-term interest rates down and encourage borrowing and spending. The Fed has said it plans to continue its $85 billion-a-month in Treasury and mortgage bond purchases until the job market improves substantially.

The timing of any policy shift remains hazy.

Some Fed officials have said the central bank should start to curtail its bond purchases before year's end, so long as the economy has improved. Other officials have suggested the opposite: that the Fed might have to expand its bond buying if the economy needs it.

In recent weeks, the job market and the broader economy have shown renewed vigor. Employers added a solid 165,000 jobs in April and drove down the unemployment rate to a four-year low of 7.5 percent.

The economy has benefited from a resurgent housing market, rising consumer confidence and the Fed's stimulus actions, which have helped ignite a stock market rally. The Standard & Poor's 500 stock index has jumped 17 percent this year to a record high. Higher stock prices tend to make many people feel wealthier and more inclined to spend.

Those gains, in part, are why critics of the bond purchases, including some Fed regional bank presidents, have questioned the need to continue them at their current pace. They argue that keeping interest rates too low for too long could send inflation surging or inflate dangerous bubbles in assets such as stocks or real estate. Such a bubble could burst with the same destabilizing effects that the housing bust caused.

For now, Bernanke commands solid support for the bond purchases among the voting members of the Fed's interest-rate setting committee. At each of the Fed's three policy meetings this year, the committee has approved the purchases 11-1.

Fed officials who support the current level of bond purchases note that the unemployment rate, while improved, remains high even though the Great Recession ended four years ago. They also note that inflation remains lower than the target rate the Fed prefers.

When the Fed next meets June 18-19, some economists say it might signal that it will taper its bond purchases later this year. The June meeting is one of four each year when Bernanke holds a news conference after the Fed's meeting to discuss any policy changes.

Still, comments by two Fed officials Tuesday suggested that the central bank might continue its aggressive economic support -- and perhaps expand it.

William Dudley, head of the New York Federal Reserve Bank, said lingering economic uncertainty could lead the Fed to increase the purchases. After its last meeting, a Fed statement signaled concern that tax increases and spending cuts that kicked in this year were slowing the economy.

"I cannot be sure which way -- up or down -- the next change will be," Dudley, an influential voice on the Fed's policymaking committee, said in a speech. "Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment."

Also Tuesday, James Bullard, president of the St. Louis Fed and a voting member of the interest-rate panel this year, suggested that the Fed should continue its current level of bond purchases.

On Wednesday, a few hours after Bernanke testifies, the Fed will release the minutes of its last meeting on April 30-May 1. The statement the Fed issued after that meeting signaled that it could either increase or decrease the pace of its bond purchases depending on how the job market and inflation fare.

The minutes will be reviewed for hints of how much dissension exists within the Fed about continuing the aggressive stimulus efforts.

Though the job market and retail sales have shown further strength since that meeting, other indicators have encouraged caution. U.S. manufacturing, for example, sagged in April, reflecting in part continued global weakness. Europe, a big export market for U.S. companies, is struggling with a prolonged recession.

[Associated Press; By MARTIN CRUTSINGER]

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