The chairman of the Federal Reserve, Ben Bernanke, denied on Wednesday that his $85bn-a-month stimulus programme was creating new financial bubbles, as he updated Congress on his views on the US economic recovery.
The Fed's quantitative easing programme has driven US stock markets to record highs, even as the wider economy continues to suffer from high levels of unemployment. Questioned about whether the stimulus programme was creating bubbles similar to the one experienced by the housing market before the recession, Bernanke said "major asset classes, including the stock markets, were "not inconsistent with the fundamentals".
US stock markets continued to rally on Wednesday as Bernanke made clear that he has no intention of cutting short the quantitative easing programme in the near future. The US economy is improving but "headwinds", including government budget cuts, are dragging on the recovery, Bernanke said.
Bernanke warned again that Washington's deep spending cuts were holding back the recovery. "Conditions in the job market have shown some improvement recently," he said. "Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work."
Bernanke acknowledging that historically low interest rates and the Fed's huge government bond-buying programme had costs but said "a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery".
Republican congressman Kevin Brady, from Texas, questioned Bernanke about his exit strategy from quantitative easing. "My worry is the Fed doesn't have the prescription for what ails our economy," he said.
Bernanke acknowledged the recovery had been slow but said it had faced "significant headwinds", including deep government spending cuts. He said it was "not responsible to focus all of the restraint on the very near term" and urged Congress to replace some of its fiscal tightening with measures to restrain long-term healthcare and social security costs.
Senator Pat Toomey, from Pennsylvania, said he was concerned about recent spikes in the housing market, farm land prices and junk bonds. "I don't disagree that this is not easy," said Bernanke. "There is no risk-free strategy here."
Bernanke said he was particularly concerned about the recession's continuing impact on the long-term unemployed. In April, there were 4.4 million long-term unemployed people in the US – those jobless for 27 weeks or more – according to the Labor Department. Their share of the unemployed declined by 2.2% to 37.4%. The levels remained a "significant concern", said Bernanke. "We are seeing evidence that employers are reluctant to look at people if they have been out of work for a long time," he said. But he said he believed it was not an "irreversible problem".
Speculation has been rising that the Fed might be preparing to taper off its bond purchases; some Fed members have called for the policy to be reassessed. Bernanke said the Fed would consider to monitor the situation and would taper off the programme "as the economic outlook improves". But he said a wind-down would not be an "automatic, mechanistic process".
Paul Ashworth, chief US economist at Capital Economics, said: "All things considered, we still think that the Fed will begin to curb its asset purchases before the end of the year, with a complete halt sometime in the first half of next year."
US stock markets surged on after Bernanke's remarks, with all the major markets rising in morning trading.
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