The Federal Reserve will not be in a hurry to raise short-term interest rates, even after the unemployment rate comes down markedly, Chairman Ben Bernanke said Wednesday.
The Fed has set an unemployment rate threshold of 6.5% for the first rate hike from the current near-zero levels that have been in place since December 2008. The central bank has gone to great pains to stress that this tool is separate from the bond-buying program. The jobless rate was 7.6% in June.
Bernanke said the central bank will be in no rush to hike rates once the threshold is reached.
“There will not be an automatic increase in interest rate when unemployment hits 6.5%,” Bernanke said in the question-and-answer session of a speech to economists.
Ben S. Bernanke, chairman of the U.S. Federal Reserve, in June
Given the weakness of the labor market, and low inflation “it may be well sometime after we hit 6.5% before rates reach any significant level,” Bernanke added.
U.S. stock futures rose on the comments, with the S&P 500 (GLC:SPU3) contract tacking on about 0.7%.Read After Hours column for more markets coverage.
The Fed chairman drew a clear distinction between asset purchases and rate hikes.
The purpose of the asset purchases is to give the economy some forward momentum, Bernanke said.
Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, said he was sticking with his forecast of a September tapering after Bernanke spoke.
Bernanke did make some fairly dovish comments.
He said that it is too early to tell if the economy had weathered the headwinds from fiscal policy and said the U.S. still faces “significant risks”
He also said that the unemployment rate probably understates the weak condition of the labor market.
And he stressed that the Fed was concerned about the current very low inflation rate.
If inflation does not move up closer to the central bank’s 2% target, “that would be a good reason to remain accommodative,” he said.
Bernanke defended his decision to lay out a potential timetable for winding down asset purchases after the Fed’s last meeting.
The Fed chairman said the central bank could start winding down its $85 billion a month bond-buying program later this year and end it altogether by mid-2014.
“Notwithstanding some volatility that we’ve seen in the last six weeks, speaking now and explaining what we are doing might have avoided a much more difficult situation,” he said.
If financial conditions tighten too much to jeopardize the Fed’s goals, “we would have to push back,” he said.
At the moment, “with some luck,” positive factors will generate faster growth and labor market improvement through the rest of the year, he said.
Bernanke spoke after the central bank released the minutes of the Fed’s last policy-making meeting.
The minutes show a wide range of views among the central bankers on when to start to wind down the asset purchases.
But about half of the Fed’s top 19 officials said it would be appropriate to end the asset purchase plan late this year.