At his press conference on July 19, Fed Chairman Bernanke strongly suggested that QE would be tapered within the next few months and probably terminated by mid-2014 as long as the labor market continued to improve. Late this afternoon, he simplified the message in response to a question after a speech in Cambridge, Mass. He said, “Highly accommodative monetary policy for the foreseeable future is what’s needed in the US economy.” Actually, he answered numerous questions from the audience. The transcript of the Q&A shows that this statement appeared in the context of the following response to a question on whether the Fed is turning hawkish:
The [Fed’s] dual mandate is to pursue maximum employment and price stability. Currently, we have an unemployment rate of 7.6%, which I think, if anything, overstates the health of our labor markets given participation rates and many other indicators of underemployment and long-term unemployment. So we’re not there, obviously, on the maximum employment part of the mandate. On price stability, inflation is now about 1%, which is below our 2% objective. So both sides of our mandate--both the employment side and the inflation side, are saying that we need to be more accommodating. Moreover, the other portion of macroeconomic policy--fiscal policy is now actually quite restrictive. The CBO estimates that current federal fiscal policy is subtracting 1 1/2 percentage points or so of growth from the U.S. economy this year. So you put that all together, and I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.
Mr. Bernanke didn’t talk much about QE. Instead, he focused on NZIRP, saying that the federal funds rate would stay near zero:
And in particular, we said that we will not raise interest rates until--at least until unemployment hits 6.5%, as long as inflation is well-behaved--again, I think as I’ve said before, that that 6.5% is a threshold, not a trigger. There will not be an automatic increase in interest rates when unemployment hits 6.5%. Instead, that will be a time to think about the situation anew. And given, as I said, the weakness of the labor market, the fact that the unemployment rate probably understates the weakness of the labor market, given where inflation is, I would suspect that it may be well sometime after we hit 6.5% before rates reach any significant level.
He concluded this response by implying that even if QE is tapered, overall monetary policy will remain very easy because the federal funds rate will remain near zero for a long while:
So again, the overall message is accommodation. There is some prospective gradual and possible change in the mix of instruments. But that shouldn’t be confused with the overall thrust of policy, which is highly accommodative.