Federal Reserve's Ben Bernanke aims to reassure markets

Samira Hussain reports on the challenges ahead for the US economy

Federal Reserve chairman Ben Bernanke, in his bi-annual testimony to Congress, sought to reassure markets about plans for ending its policy of easy money.

Mr Bernanke said the end to easy money was not on a "preset course".

He defended the bank's transparency policy, saying "markets are beginning to understand our message and volatility has moderated".

His comments in May suggesting that the bank might end its purchase of bonds had led markets to fluctuate wildly.

For months, each utterance by Mr Bernanke and his fellow Fed officials has been scrutinised for hints of when the flow of easy money might be turned off or tightened.

Painting into a corner

By buying up bonds, the Fed has tried to lower long-term interest rates in the hopes of spurring economic activity. Lower long-term interest rates should encourage consumers and businesses to take out loans for everything from homes to new equipment.

Yields on 10-year US Treasury bonds hit two-year highs and mortgage rates spiked as fears about the end of easy money led many traders to rebalance their portfolios.

In his testimony, Mr Bernanke sought to reassure markets once and for all that winding up - or tapering - the programme would not happen until the US economy was on solid footing.

A spate of weak economic data - including sluggish retail sales this week - might give the Fed pause as it looks to start tapering in September.

And, as Mr Bernanke's term comes to an end, the deliberate attempts to keep the Fed policy open and flexible might be as much about the current Fed make-up as its future.

"My expectation is that chairman Bernanke wants to leave the next chairperson of the Fed with as much policy latitude as he can and not paint that person into a corner," says chief market strategist Steve Wood of the Russell Investment Group.

In a light-hearted moment, House Representative Bill Huizenga asked Mr Bernanke if a friend should refinance his house now or later - a reference to the market volatility that this flexibility has perhaps instigated.

"I'm not qualified to respond as a financial adviser," Mr Bernanke joked, while again emphasising the Fed's commitment to seeing the US economy through the recovery process.

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