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Bernanke: Changes to Stimulus Hinge on Economic Results

  • Jim Randle

The head of the U.S. central bank is telling investors and the U.S. Congress that current efforts to stimulate the economy cannot go on forever. But Federal Reserve Chairman Ben Bernanke tried to reassure the markets that stimulus efforts will be cut back gradually, and only when a strengthening economy shows they are no longer needed.
U.S. Federal Reserve Chairman Ben Bernanke is speaking to congressional committees Wednesday and Thursday, but his message is aimed at financial markets.
Stock and other markets fell sharply recently when he said a major effort to stimulate the economy might be cut back later this year. Wednesday, the top central banker emphasized, again, that those cuts will not be made until the economy gets stronger.
One Fed program is intended to bolster the economy by pushing down long-term interest rates, which makes it easier for businesses to buy equipment and families to purchase homes and cars. The complex process involves purchasing $85 billion worth of securities each month.
"I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course," he said.
The Fed has also tried to boost the economy by cutting short-term interest rates nearly to zero. That program is expected to continue at least until the U.S. unemployment rate falls to 6.5 percent or less, which is not likely to happen until next year.
Former Federal Reserve economist Steve Oliner, who is now a scholar at the American Enterprise Institute, says the Fed is looking for the right time to cut stimulus programs, because they can hurt the economy if they go on too long.
"One danger would be that if the asset purchases, in particular, were continued for too long, they could end up causing new asset bubbles in different parts of the financial markets. Which is something the Fed is concerned about," he said.
The housing bubble, for example, saw home prices pushed up to unsustainable levels, and the subsequent market turmoil played a role in the financial crisis.
Peterson Institute Economist Joseph Gagnon, who previously worked at the Federal Reserve and the U.S. Treasury, says Bernanke is moving cautiously.
"We are not in a hurry to tighten and we will eventually tighten. Yes, the economy is getting better and so we have to get to normal, but the pace we get to normal is going to be very slow," he said.
Bernanke's effort to reassure markets may have worked, as U.S. and European stock prices rose after he spoke.