Fed to keep interest rate low after winding down bond purchases: Bernanke

21 Nov 2013

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Federal Reserve chairman Ben S Bernanke said the Fed intended to keep its target interest rate long after ending $85 billion in monthly bond buying, and possibly after unemployment fell below 6.5 per cent.

''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 jobless rate breaches the Fed's 6.5 per cent threshold, he said yesterday in a speech to economists in Washington. He added, a ''preponderance of data'' would be needed to begin removing accommodation.

In deciding when to wind down open-ended purchases of bonds, Fed officials are weighing both the ''cumulative progress'' since they started the programme in September 2012 as also ''the prospect for continued gains,'' Bernanke said. The labour market had shown ''meaningful improvement'' with the start of the programme.

Policy makers are debating how asset purchases could be slowed down without setting off a surge in interest rates that could put at risk the over four-year economic expansion. Central bankers have sought to impress on investors that the slowdown would not mark a move towards increase in the benchmark interest rate.

Responding to audience questions, Bernanke said markets were doing a better job ''differentiating'' between the Fed's plans to hold interest rates low even after it started slowing bond purchases.

Meanwhile, in her senate confirmation hearing last week, Janet Yellen who will take over from Ben Bernanke as chairman of the Federal Reserve, has pledged to make tackling the problem of banks that are "too big to fail" as her top priority.

Commentators say it would not be a promise too big to keep.

Responding to a question from Ohio Democrat Sherrod Brown, Yellen had said that addressing ''too big to fail'' had to be among the most important goals for the post-crisis period. Yellen is currently vice chair at the Fed.

She said, too big to fail was damaging, it created moral hazard, it corroded market discipline, created a threat to financial stability, and it did - unfairly in her view - advantage large banking firms over small ones.

Commentators, however, point out that addressing the problem was easier said than done.

In a report issued last week the Government Accountability Office suggested that the Fed was dragging its feet on rules mandated by the Dodd-Frank financial reform to remedy too big to fail - notably by limiting the aid it could provide to banks in an emergency.

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