Bernanke acknowledges economy outperforms Fed’s expectations

WASHINGTON — Chairman Ben Bernanke told lawmakers Wednesday that the U.S. economy has performed better in recent months than the Federal Reserve had expected.

WASHINGTON — Chairman Ben Bernanke told lawmakers Wednesday that the U.S. economy has performed better in recent months than the Federal Reserve had expected. If the trend continues, he said the Fed might have to reassess its outlook for a slow recovery.

Investors appeared to take Bernanke’s more optimistic words as a signal that the Fed is less likely to adopt further steps to boost growth. It could also mean that the Fed could back off its plan to hold its key interest rate near zero until late 2014.

Stocks and bond prices both fell. Analysts said Bernanke’s speech was notable for what it didn’t include: any mention of a new round of government bond-buying.

Speaking at a hearing of the House Financial Services Committee, Bernanke cautioned that the Fed doesn’t expect the sharp drops in unemployment to continue this year and it plans to stick with its policy on interest rates.

Still, he said the Fed’s late-2014 target for any increase in interest rates is tied to the economy’s health and the Fed might have to adjust its target if the economic outlook improves.

“The policy is conditional,” Bernanke said in response to a question on the topic. “It is based on what we know now.”

A spike in inflation could also force the Fed to reconsider that policy. Gasoline prices are rising again. Bernanke said that will likely push inflation up temporarily while depressing consumers’ purchasing power.

Still, he said that the Fed continued to believe that longer-term inflation would remain subdued. He said maintaining a policy that keeps rates low for an extended period “tended to put downward pressure on longer-term interest rates.”

Some analysts took Bernanke’s remarks to mean the Fed is less likely to buy more Treasury or mortgage bonds to try to drive down long-term rates.

“The possibility of further purchases of mortgage-backed securities by the Fed to help revive housing had been widely discussed in recent weeks,” said Kevin Logan, chief U.S. economist at HSBC. “Bernanke made no mention of this possibility or of any type of quantitative easing.”

The Fed has held its benchmark interest rate at a record low near zero since December 2008.

Lawmakers and some economists have begun to question whether keeping rates that low for another three years will heighten the risk of inflation, especially if the economy continues to improve and companies keep hiring.

The unemployment rate has fallen for five straight months and employers have added an average of 200,000 net jobs per month from November through January. Many economists are predicting that trend carried over into February.

Shortly before Bernanke spoke Wednesday, the government said the economy grew at a solid 3 per cent annual rate in the final three months of last year. That was slightly better than its initial estimate. And it said income in the last six months of 2011 grew faster than previously thought.

Consumer confidence rose this month to the highest point in a year, which should lead to more spending and faster growth. Stocks have been surging — the Dow Jones industrial average on Wednesday closed above 13,000 for the first time since May 2008.

Bernanke acknowledged that unemployment, now at 8.3 per cent, has fallen faster than the Fed had predicted. He says the Fed doesn’t expect the rate to continuing falling as fast this year. But if it does, he says the Fed would reassess its economic outlook.

“In light of somewhat different signals received recently from the labour market than from indicators of final demand and production … it will be especially important to evaluate incoming information to assess the underlying pace of the economic recovery,” Bernanke said.

———

AP Economics Writer Derek Kravitz contributed to this report.

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