–No Fear About Lack Of Investor Interest When Asset Sales Begin

By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve has tools that it utilized,
successfully, to support the economic recovery and it will continue to
use them “appropriately” as it evaluates the direction of the economy,
Fed Chairman Ben Bernanke said Thursday.

“We can continue to use monetary policy as appropriate, as the
outlook changes, to try to achieve the appropriate recovery while still
maintaining price stability,” Bernanke said during his fourth and final
lecture to students at George Washington University.

Asked what economic data he is monitoring to assess the economy’s
progress, Bernanke said one thing the Fed is paying a lot of attention
to are developments in the labor market.

“Jobs, unemployment rate, unemployment insurance claims, hours of
work, all those indicators suggest the labor market is strengthening,”
he said. “So clearly that’s something we’d like to see sustained, we’d
like to see a continued improvement in the labor market.”

Bernanke then repeated that the improvement in the jobs markets is
more likely to be sustained with increases in overall demand and growth.

“So we’ll continue to look at indicators of consumer spending and
consumer sentiment, capital plans, capital expenditures, indicators of
optimism on the part of firms … to see where production and demand are
going to go,” he said.

The Fed will also have to keep an eye on inflation, Bernanke
continued, and “be comfortable” that price stability will be maintained
and inflation remains low and stable.

“As the economy strengthens and becomes more self-sustaining, then
— at some point — the need for so much support from the Fed will begin
to diminish,” he said.

The Fed’s policymaking Federal Open Market Committee has indicated
that prior to the first increase in the federal funds rate, it would
likely cease reinvesting some or all payments on the securities holdings
in its portfolio, and would likely begin sales of agency securities
sometime after the first rate increase.

Bernanke acknowledged that “it’s certainly possible that the
interest rate that will prevail when we sell those securities will be
higher than it is today,” adding, “in other words we’ll have to pay a
higher interest rate in order to make investors willing to acquire
them.”

But that will be part of the tightening process, given that the Fed
will be trying to raise interest rates at that point in order to exit
from its easy policy, Bernanke said.

So there is no danger that investors will show no interest in
buying the assets, he said, and the higher yield would aid the objective
of tightening financial conditions so as to avoid inflation concerns in
the future.

After the January FOMC meeting, the Fed adopted an explicit 2%
annual inflation target, around the international consensus, Bernanke
said.

“For the foreseeable future that’s where we plan to stay,” Bernanke
added.

The key is to have an inflation level that provides a buffer
against the deflation threat, while ensuring it is not so high that it
affects the working of the market, he said.

** MNI Washington Bureau: 202-371-2121 **

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