Fed to maintain low interest rates

WASHINGTON — The United States Federal Reserve Chairman Ben Bernanke said the central bank would maintain ultra-easy US monetary policy for as long as needed, which could mean holding interest rates near zero till “well after” unemployment in the country falls below 6.5 per cent.

In a speech in Washington on Tuesday evening, which echoed dovish comments by his nominated successor Janet Yellen, Mr Bernanke also said that, while the economy had made significant progress, it was still far from where officials wanted it to be.

The Federal Open Market Committee (FOMC), which sets policy, “still expects that labour market conditions will continue to improve and that inflation will move towards the 2 per cent objective over the medium term”, said Mr Bernanke.

“If these views are supported by incoming information, the FOMC will likely begin to moderate the pace of purchases.”

The Fed has held interest rates near zero since late 2008 and quadrupled its balance sheet to US$3.9 trillion (S$4.85 trillion) through three massive rounds of bond buying.

The central bank’s policymakers would like to wind down the purchasing of bonds and see interest rates stay low. But when Mr Bernanke hinted in June that the Fed was getting ready to taper off the purchases, investors responded as if the central bank had also announced its intent to raise interest rates more quickly.

The FOMC renewed its pledge last month to maintain asset purchases at a US$85 billion monthly pace, until the outlook for the labour market “improved substantially”.

Fed officials meet on Dec 17 and 18, although most economists do not think they will begin to scale back bond buying until their meeting in January or March.

Mr Bernanke said on Tuesday that investors need to understand that tapering off the bond purchases would not signal plans by the Fed to raise interest rates more quickly.

“Markets are beginning to appreciate that they are separate tools and the mix of those tools will change somewhat over time,” he said, in reference to bond purchases and interest rates. “It’s the most fundamental point I wanted to make,” he added.

“The target for the federal-funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after (the jobless rate breaches the central bank’s 6.5 per cent threshold),” said Mr Bernanke.

A “preponderance of data” would be needed to begin removing stimulus, he added. Agencies