The most recent FOMC meeting minutes and comments from Fed officials suggested that the Fed may put an early end to its open-ended QE program, but according to Fed Chairman Ben Bernanke, the central bank has no plans of an early exit.
He added that the Fed will continue with its $85 billion monthly bond purchases until the labor market shows "substantial improvement." Take note - he doesn't just want your run-of-the-mill improvement but SUBSTANTIAL improvement. What we can gather from this statement is that the Fed is in no rush to pull the plug on its QE program, at least not until it makes some serious headway in achieving its unemployment rate target of 6.5%.
Luckily, in terms of inflation, the Fed still has quite a bit of leg room to keep easing. Not only are inflationary levels currently at manageable levels, but the outlook for consumer prices doesn't seem threatening either.
Pros of accommodative monetary policy still outweigh the cons
Bernanke reassured the markets that the Fed will maintain its stance on monetary policy, but that's not to say that he doesn't see the risks involved with the central bank's unprecedented asset purchases. He acknowledged that easy monetary policy presents threats of its own, but overall, it does the economy more good than bad.
In recent weeks, there has been a lot of concern about the possibility that the super-easy policy could promote excessive risk-taking and lead to financial instability. However, Bernanke believes that this same approach towards monetary policy has also helped the economy recover in key areas (i.e. the housing market and sales of automobiles and durable goods). Overall, he still feels that it promotes job growth and a stronger economic recovery.
Bernanke calls out lawmakers
Bernanke also feels that since the central bank is doing its part to boost the economy, lawmakers over at Washington should do the same.
The problem is that the U.S. government has been looking for ways to shore up its balance sheet and one way it has decided to do so is by implementing strict spending cuts that will kick in this Friday. Combining this with tax increases that were agreed upon earlier in the year could actually put a major drag on economic recovery and quite possibly send the U.S. back into another recession!
Fed not participating in a currency war
As for the issue of a brewing currency war, Bernanke downplayed the Fed's commitment to asset purchases as an avenue to weaken the dollar. He said that the Fed was not engaging in a currency war of any sort, despite the growing notion that that is exactly what many central banks have been doing.
In any case, the main takeaway from Bernanke's testimony is that the Fed is dedicated to supporting the economy through aggressive asset purchases. This means that despite the hawkish tone that the recent FOMC meeting minutes had, it doesn't seem like the central bank is in any rush to start withdrawing stimulus any time soon.