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Continued: 'Deputized' to provide clarity, Bernanke explains Fed plan to scale back bond-buying program

  • Article by: MARTIN CRUTSINGER , AP Economics Writers
  • Last update: June 20, 2013 - 1:25 PM

The Fed also said it would keep short-term rates at record lows at least until unemployment slides to 6.5 percent. Bernanke emphasized that 6.5 percent unemployment is a threshold, not a trigger: The Fed might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.

"When we get to that point," Bernanke said, the Fed will "look at whether an increase in rates is appropriate."

One factor it will consider is inflation. If inflation falls too far below the Fed's target of 2 percent, it might decide to keep short-term rates at record lows. The goal would be to fuel more economic growth, which could lead to higher inflation.

Yet markets have been tumbling since Bernanke spoke. The Dow Jones industrials fell 206 points, or 1.4 percent, Wednesday and plunged another 200-plus points Thursday.

Investors dumped bonds, pushing the yields higher. The yield on the benchmark 10-year Treasury note rose past 2.40 percent Thursday to its highest level since August 2011.

The economists at PNC Financial Services Group said the market sell-off was probably an "overreaction" to Bernanke's comments. If the Fed scales back its bond purchases, after all, it would mean the economy is strengthening, something that should be good for corporate profits and for stocks.

The Fed faces a tough decision: If the central bank pulls back its stimulus too soon, the U.S. economic recovery could sputter. If it waits too long, super-low rates could ignite inflation. Or they could swell speculative asset bubbles as investors pursue riskier investments with potentially richer returns than low-yielding bonds.

The Fed knows the timing is tricky. It ended an earlier round of bond purchases in June 2011 only to see economic growth remain weak and unemployment stay at levels more consistent with a recession than a healthy recovery.

And if the Fed puts out a confusing message, investors could panic, dump bonds and drive rates high enough to jeopardize economic growth.

"We are determined to be as clear as we can," Bernanke said at Wednesday's press conference, "and we hope that you and your listeners and the markets will all be able to follow what we're saying."

Since becoming chairman in 2006, Bernanke has labored to make the famously secretive central bank more open to the public. In 2011, he began holding regular news conferences to clarify Fed policy, something that would have been unthinkable under his predecessor, Alan Greenspan, who took pride in being as baffling as possible.

But on one subject Bernanke chose discretion over candor: He declined to address speculation that he will step down as Fed chairman when his term ends in January.

He was asked to respond to comments Monday by President Barack Obama, who said Bernanke had already stayed longer than planned. The president's remarks added to expectations that Bernanke intends to step down. Bernanke demurred.

"I would like to keep the discussion on monetary policy," he said. "I don't have anything for you on my personal plans."

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