Bernanke: Economy Still Too Shaky To End Low Interest Rates

Over the past several years, the Federal Reserve has added trillions of dollars to its balance sheet, purchasing bonds in order to stimulate the economy. Many investors have been concerned that when the Fed starts selling off those bonds it could create turmoil in the markets. But in congressional testimony Wednesday, Fed Chief Ben Bernanke said the Fed might not sell off those bonds at all.

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For those who closely follow decisions made by the Federal Reserve, today's marquee event was the testimony of Fed Chairman Ben Bernanke. He appeared on Capitol Hill before the Joint Economic Committee of Congress. And some lawmakers asked Bernanke about concerns of chaos in the financial markets once the Fed stops pumping money into the economy. NPR's John Ydstie explains.

JOHN YDSTIE, BYLINE: Let's first step back and consider what the Fed's been doing to try to boost growth in the past five years. They've injected a huge amount of money into the economy by buying government bonds and mortgage-backed securities, around $2 trillion worth. That amount grows each month at the rate of $85 billion as the Fed continues its purchases. The Fed's action has driven interest rates down and made vast amounts of cheap cash available. Investors have pushed a lot of that cash into the stock market, which has climbed sharply.

Some people are worried it's created a stock bubble. Dan Coates, a Republican congressman from Indiana, is one of them. He shared his concern with Chairman Bernanke today.

REPRESENTATIVE DAN COATES: There's a big surge in the market here that seems to be not enforced by underlying fundamentals, but I'd like your take on that.

BEN BERNANKE: Well, we're watching it carefully, and, of course, nobody can ever say with certainty what an asset price should be. But to this point, our sense is that major asset prices, like stock prices and corporate bond prices, are not inconsistent with the fundamentals.

YDSTIE: So Bernanke is watching but not too worried. What happens, though, when the Fed decides the economy needs less help and it starts trimming back its $85 billion in monthly purchases? Minutes of the Fed's last meeting three weeks ago show policymakers are discussing tapering off those purchases. That would cut back on the fuel supply for the economy and the market. Today, Representative Kevin Brady, a Republican from Texas, asked Bernanke when the tapering will begin.

REPRESENTATIVE KEVIN BRADY: At the pace we're going, do you think it's likely these actions will begin before Labor Day?

BERNANKE: I don't know. It's going to depend on the data. If the outlook for the labor market improves and we are convinced that that is sustainable, we will respond to that. If the recovery were to falter, then we would delay that process.

YDSTIE: The chairman said the timing would be discussed at the Fed's next few meetings. Now, the stock market fell today as investors got nervous even at the suggestion that the fuel that's helped to propel the market might be slowing. But the real doomsday scenario for the market comes when the Fed decides not just to slow the flow of fuel but starts draining fuel out of the tank. That process would involve the Fed reversing course and selling off its $2 trillion hoard of securities. That was part of the Fed's initial strategy for exiting its stimulative policy. But today, Bernanke said maybe not.

BERNANKE: At this point, it does not appear that it is necessary for us to sell any assets or particularly not anymore expect securities in order to exit. And I think there's some advantages to doing that.

YDSTIE: Rather than sell the assets, the Fed will just hold on to them until they mature. One big advantage, Bernanke says, less disruption for the markets. John Ydstie, NPR News, Washington.

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