The Commercial Appeal
Fed officials seek to stall gains in long-term rates
WASHINGTON — Federal Reserve officials Thursday stepped up their campaign to stem an increase in longterm borrowing costs that threatens to blunt the U.S. expansion and sought to clarify comments by Chairman Ben Bernanke that sparked turmoil in global financial markets.
William Dudley, president of the Federal Reserve Bank of New York, said any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” He said bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts.
Concerns the Fed may curtail accommodation helped push the yield on the 10year Treasury note as high as 2.61 percent this week from as low as 1.63 percent in May. The remarks by Dudley, who also serves as vice chairman of the policy-setting Federal Open Market Committee or FOMC, along with Fed governor Jerome Powell and Atlanta Fed president Dennis Lockhart sought to dampen expectations that an increase in the benchmark interest rate will come sooner than forecast.
“Such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants,” said Dudley, a former chief U.S. economist for Goldman Sachs.
Bernanke, at a June 19 press conference following a meeting of the FOMC, outlined a plan for the reduction in the bond purchases that have helped spur growth and fuel a stock market rally. He said the Fed could start curtailing the current $85 billion pace later this year and end them around mid-2014, assuming the economy meets the Fed’s forecasts.
Powell said a decision to reduce purchases would depend on economic data, and that there’s no set timetable. “I want to emphasize the importance of data over date,” Powell said at the Bipartisan Policy Center in Washington. “In all likelihood, the current” large-scale asset purchases “will continue for some time.”
The officials spoke a day after a Commerce Department report showed firstquarter growth in the United States was less than forecast as a payroll tax increase reduced consumer spending.
“I continue to see the economy as being in a tug-of-war between fiscal drag and underlying fundamental improvement, with a great deal of uncertainty over which force will prevail in the near-term,” Dudley said.
Much of the decline in the jobless rate, Dudley said, is a result of workers leaving the labor force. “Job loss rates have fallen, but hiring rates remain depressed at low levels,” he said. “The labor market still cannot be regarded as healthy.”
The FOMC has said it will keep its benchmark rate close to zero as long as unemployment exceeds 6.5 percent and the outlook for inflation is no more than 2.5 percent.