Federal Reserve Chairman Ben Bernanke on Wednesday downplayed speculation that the central bank is planning to taper its $85 billion monthly bond buying program.
The economic recovery remains too fragile to proceed without extraordinary support from the Fed in light of fiscal restraint and headwinds from Europe, Bernanke said in semi-annual testimony before the Joint Economic Committee.
"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further," Bernanke told lawmakers.
Some of his Fed colleagues disagree. San Francisco Fed President John Williams said yesterday that Fed may be able to taper its bond purchases as early as this summer.
However, most economists think that Bernanke can wield enough influence to keep easy monetary policy in place until unemployment drops below the Fed's 6.5 percent target.
With unemployment expected to remain above 7 percent this year, markets are convinced the current bond-buying plan will remain for the foreseeable future. Stocks rallied to a new record high on Tuesday, with the Dow up 52.30 points at 15,387.58.
He assured that policy makers are ready to scale back the QE3 program if presented with data showing sustainable improvement in the labor market. "The key to this program is the data," Bernanke said.
"In the current economic environment, monetary policy is providing significant benefits. Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices," the Chairman said.
Bernanke warned that persistent unemployment could have significant long-term costs for the economy.
"Not only do high rates of unemployment impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place," Bernanke said.
Bernanke vigorously defended QE3 against critics who say the bond-buying plan needlessly risks runaway inflation. He pointed to Fed projections that inflation will hold below their 2 percent target for the next few years.
"If anything, inflation is too low," he said in the question and answer portion of the testimony. In that view, the Fed is fulfilling its dual mandate to promote both price stability and low unemployment.
Asked why the recovery was taking so long, Bernanke chided Congress for making poorly-timed budget cuts that have only served as a drag on the economy.
Without the Fed's actions, the recovery would have taken considerably longer, according to Bernanke, who urged lawmakers to address the federal government's longer-term fiscal imbalances without aggressively cutting spending until the economy is back on solid footing.
"The Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run," Bernanke said.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.