Federal Reserve Chairman Ben S. Bernanke said raising interest rates or reducing asset purchases too soon would endanger the recovery as the economy remains hampered by high unemployment and government spending cuts.

“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 said today in testimony to the Joint Economic Committee of Congress in Washington.

Bernanke lamented the human and economic costs of anunemployment rate at 7.5 percent nearly four years into the recovery from the deepest recession since the Great Depression, and he said the Fed’s record easing is providing “significant benefits.” His comments echoed remarks by William C. Dudley, president of the Federal Reserve Bank of New York, who said in an interview that it would take three to four months before policy makers will know whether a sustainable recovery is in place.

Fed officials “need to see inflation expectations remain in a desired range, they need to see that the peak home-buying season goes as well as it can, and they need to see that we have absorbed the bulk of the huge fiscal consolidation” before they reduce the pace of purchases from $85 billion a month, said Lou Crandall, chief economist at Wrightson ICAP LLC inJersey City, New Jersey.

Stocks erased an early rally and Treasuries fell after Bernanke said the Fed could “take a step down in our pace of purchases” in the “next few meetings.”

Brady Question

“We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook,” Bernanke said in response to a question from Representative Kevin Brady, the Texas Republican who chairs the committee. “If we see continued improvement and we have confidence that that is going to be sustained, then we could in — in the next few meetings, we could take a step down in our pace of purchases.”

The Standard & Poor’s 500 Index fell 0.6 percent to 1,659.54 at 2:54 p.m. in New York. Yields on the U.S. 10-year note rose above 2 percent for the first time since March.

“The market reacts pretty wildly to any hint of exit,” said Michael Hanson, senior economist at Bank of America Corp. in New York. “It’s a small exit and a lot of people are trying to get out of it — like a rock concert.”

“The Fed is not looking to very quickly get out of this,” said Hanson, a former Fed economist. “There’s obviously a few members who want to wrap this up sooner than later, but Bernanke doesn’t seem eager to pull back on QE very soon. He wants to see more evidence that the economy really is moving on a forward path.”

More Progress

Many Fed officials said more progress in the labor market is needed before deciding to slow the pace of asset purchases, according to minutes of their last meeting released after Bernanke’s testimony.

“Most observed that the outlook for the labor market had shown progress” since the bond-buying program began in September, according to the record of the April 30-May 1 gathering released today in Washington. “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”

 

Bernanke Says Premature Tightening Would Endanger Recover – Bloomberg.