Federal Reserve Chairman Ben Bernanke mollified investors Wednesday with
testimony that the central bank's $85 billion per month in bond purchases "are
by no means on a preset course."
Testifying before the House Financial Services Committee, Bernanke said the Fed's quantitative stimulus program depends on economic and financial developments.
"If economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly," Bernanke said. "On the other hand, if the outlook for employment were to become relatively less favorable -- if inflation did not appear to be moving back toward 2 percent, or if financial conditions, which have tightened recently, were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer."
Wall Street's reaction was measured, with stock indices rising modestly in contrast to an almost 6 percent drop in the S&P 500 triggered by comments made by Bernanke on May 22 and minutes from a Fed meeting released that day.
The S&P 500 rose 0.3 percent to 1,680.91 yesterday, after falling from a record high on Tuesday, while the Dow Jones Industrial Average climbed 0.1 percent to 15,470.52.
It was a "flattish response to flattish news," said Stephen Wood, chief market strategist for Seattle-based Russell Investments.
"In May, (Bernanke) intimated to the markets that QE would not become 'QE perpetuity,'" Wood said. "But recently, he doesn't want to commit himself to a specific calendar date for tapering either. This brings to the Fed more policy flexibility to respond to economic conditions. He's willing to discuss potentially toward the end of the year how hard he is going to press the accelerator, but he's not looking for the break."
The nation's economic activity increased at a modest to moderate pace in June and early July, according to the Fed's Beige Book report released yesterday that summarizes anecdotal information reported and collected by the Fed's 12 district banks.
"Residential real estate and construction activity increased at a moderate to strong pace in all reporting districts," the report said. "Manufacturing expanded in most districts."
Housing starts, however, unexpectedly dropped in June to a 10-month low, but economist Barry Bluestone said he considers the data a "blip."
"The housing market has been recovering nearly across the county in most markets and, as a result, developers are seeing signs that they can produce houses to sell on the market," said Bluestone, director of the Dukakis Center for Urban and Regional Policy at Northeastern University.
Meanwhile, Elliot Winer, chief economist at Northeast Economic Analysis Group in Sudbury, said Bernanke's comments yesterday, while consistent with previous Fed signals, seemed designed to avoid stirring the markets after his may comments were "misconstrued."
"He's almost gone out of the way to make sure he's not saying anything volatile at all," Winer said.
MIT professor Simon Johnson, a former chief economist for the International Monetary Fund and director of its research department, agreed: "I don't think there was a lot of new information. People got themselves too wound up about the exact wording of his previous remarks. They're saying don't get worked up. We're doing what we've always been doing -- trying to get the economy in a recovery mode without igniting a lot of inflation."
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