Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee on Thursday, saying the Fed will maintain its “highly accommodative” monetary policy due to high unemployment levels and lower than expected inflation.
Bernanke said the Fed generally provides monetary accommodation using the target for its federal funds rate, but the target range has remained close to zero since the financial crisis and cannot be reduced any further.
Bernanke said the Treasury has, instead, opted to expand its securities purchases—the Fed currently purchases $40 billion per month in agency mortgage-backed securities and $45 billion per month in U.S. Treasuries.
He also said the Fed will use “forward guidance” on the central bank’s plans “for setting the federal funds rate target over the medium term.”
“Within our overall policy framework, we think of these two tools as having somewhat different roles,” Bernanke said. “We are using asset purchases and the resulting expansion of the Federal Reserve’s balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability… We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low–our second tool–to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.”