As Ben Bernanke winds down his governorship of the Federal Reserve, his speech to the National Economists Club gives us some insight into what drove policy and what the Fed plans to do.
There are no hard and fast rules about the Fed’s next policy move.
“As my colleagues and I have frequently emphasised, the conditions stated in this guidance are thresholds, not triggers. Crossing one of the thresholds will not automatically give rise to an increase in the federal funds rate target; instead, it will signal only that it is appropriate for the Committee to begin considering whether an increase in the target is warranted,” Bernanke said.
This is a clear message to the markets that their focus on particular levels in the economic data is misguided.
Bernanke then set out the policy outlook for the foreseeable future:
“When, ultimately, asset purchases do slow, it will likely be because the economy has progressed sufficiently for the Committee to rely more heavily on its rate policies, the associated forward guidance, and its substantial continued holdings of securities to maintain progress toward maximum employment and to achieve price stability. In particular, the target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed and at least until the preponderance of the data supports the beginning of the removal of policy accommodation.”
Even well after QE is wound down, we are looking at a low interest rate environment for many years to come.
“The economy has made significant progress since the depths of the recession. However, we are still far from where we would like to be, and, consequently, it may be some time before monetary policy returns to more normal settings,” Bernanke said.
“I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery. The FOMC remains committed to maintaining highly accommodative policies for as long as they are needed. Communication about policy is likely to remain a central element of the Federal Reserve's efforts to achieve its policy goals.”