The Federal Reserve might put off its plans to stop infusing cash into world financial markets in the middle of 2014 if Congress enacts further deep budget cuts that prevent a pick-up in economic growth, Fed Chairman Ben S. Bernanke will tell lawmakers Wednesday.
The central bank's rate-setting committee is expecting economic growth to pick up in coming months to over 2 percent from the average so far this year of about 1 percent, in part because it sees the impact of about $600 billion of budget cuts and tax increases imposed this spring to be waning.
But if Congress and President Obama unexpectedly reach another impasse this fall over raising the national debt limit or over averting an estimated $1 trillion of 10-year budget cuts from being carried out once again next fiscal year, the Fed might have to put off its plans to stop purchasing $85 billion a month in U.S Treasuries and mortgage bonds, Mr. Bernanke said in prepared testimony to be given to the House Financial Services Committee Wednesday morning.
"I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course," he said.
"The pickup in economic growth projected by most [Federal Reserve Open Market Committee] participants partly reflects their view that federal fiscal policy will exert somewhat less drag over time, as the effects of the tax increases and the spending sequestration diminish. That said, the risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery."
The Fed would continue its stimulative bond purchases, or possibly even accelerate them, if progress toward stronger growth and lower unemployment is interrupted, he said. Another possibility is that global growth is slower than the Fed expects, causing it to pause in its tightening plans.
World financial markets were shaken last month by the plan laid out by Mr. Bernanke to end the central bank's extraordinary easing programs by mid-2014, with stock markets plunging and interest rates rising sharply around the globe.
Emerging markets and debt-strapped European countries were hit hardest, but the shock also poses a threat to the recovery in the U.S. housing market, which Mr. Bernanke said has been an essential ingredient of the overall U.S. recovery this year. For that reason, he said, the Fed is keeping a close eye on housing to ensure it weathers the full percentage point jump in 30-year mortgage rates seen last month.
Because of the sharp reaction in global markets, Mr. Bernanke and other Fed officials have taken great pains in their public appearances in recent days to explain that they only intend to suspend their cash infusions if the U.S. economy keeps improving as it has so far this year, particularly with solid growth in jobs of around 200,000 a month.
Mr. Bernanke made his remarks Wednesday as part of the Fed's twice-yearly report to Congress on monetary policy. The appearance, which will be repeated before the Senate on Thursday, may be one of Mr. Bernanke's last before Congress if, as rumored, he decides to retire at the end of his current term as chairman in January.