Scaling back of bond-buying plan ‘not set in stone’

WASHINGTON — Federal Reserve Chairman Ben Bernanke said yesterday the US central bank still expects to start scaling back its massive bond purchase programme later this year, but he left open the option of changing that plan if the economic outlook shifted.

While sticking closely to a timeline to wind down the bond buying that he first outlined last month, Mr Bernanke went out of his way to stress that nothing was set in stone.

“Our asset purchases depend on economic and financial developments, but they are by no means on a preset course,” he told the House of Representatives Financial Services Committee.

The Fed Chairman’s remarks highlight the Federal Open Market Committee’s desire to be assured that the economy and labour markets have sufficient momentum before reducing its US$85 billion (S$107 billion) in monthly bond purchases.

Mr Bernanke set off a brief but fierce global market sell-off last month when he outlined plans to reduce the quantitative easing programme and he has joined a slew of officials since then who have spelled out their intention to keep rates near zero well after the bond buying ends.

Under the timeline laid out on June 19, Fed policymakers would likely reduce their monthly bond buys later this year and halt them altogether by mid-2014, as long as the economic recovery unfolds as expected.

In his remarks yesterday, Mr Bernanke said the pace of asset purchases could be reduced “somewhat more quickly” if economic conditions improved faster than expected.

On the other hand, the current pace “could be maintained for longer” if the labour market outlook darkened, or inflation did not look like it was rising back towards the Fed’s 2 per cent goal.

“Indeed, if needed, the (Fed’s policy-setting) committee would be prepared to employ all its tools, including an increase (in) the pace of purchases for a time, to promote a return to maximum employment in a context of price stability,” Mr Bernanke said.

While the end of the Fed’s bond buying may be in view, he repeated that officials will keep rates near zero, at least until the unemployment rate falls to 6.5 per cent, as long as inflation remains in check.

Most do not expect rates to rise until sometime in 2015.

In the testimony, the Fed chairman described labour markets as “far from satisfactory, as the unemployment rate remains well above its longer-run normal level and rates of underemployment and long-term unemployment are still much too high”.

He also said the Fed would look closely at any decline in unemployment to see whether it was being driven by strength in hiring or a decline in the number of Americans looking for work, in which case, the central bank would be more patient before raising rates.

Any rate hike cycle, he said, would be gradual. AGENCIES