WASHINGTON (AP) — In his final performance, Ben Bernanke rewrote the script.Investorshad been on
edge for months about when the Federal Reserve might slowits economic stimulus. A pullback in the Fed’s bond
purchases, theyfeared, could jack up interest rates and whack stocks. Bernanke’s meremention of the
possibility in June had sent stocks tumbling.So onWednesday, Bernanke showed something he’d learned from
leading the Fedand addressing the public for eight years: Tough news goes down bestwhen it’s mixed with a
little sweetener.At his last newsconference as chairman, he explained that the Fed would trim its
monthlybond purchases by $10 billion to $75 billion — a prospect that hadworried the markets.Yet Bernanke
also calmed nerves by walkingback a plan to consider raising short-term rates once unemploymentreaches 6.5
percent from the current 7 percent.That 6.5 percentthreshold the Fed had been using? Not much of a threshold
anymore. TheFed now says it expects to keep its key short-term rate near zero "wellpast" the time
that unemployment falls below 6.5 percent.The message: The Fed expects low-cost loans to boost the economy
for, well, for a very long time.Investors rejoiced by sending the Dow Jones industrial average rocketing
nearly 300 points to a record high.Itmeans that five years after the Fed responded to the financial crisisby
cutting its key short-term rate to near zero, it has no plans tochange course. Low rates encourage spending,
hiring and investing. Atthe same time, critics say it can inflate dangerous bubbles in stocks,housing and
other assets.Bernanke’s remarks suggested that threefactors had led him to the balance he struck Wednesday:
The unemploymentrate can be misleading. The Fed wants to avoid setting unrealisticexpectations. And
inflation remains so low that it poses a potentialproblem for the economy."It comes out of the danger
that you’regetting so specific with these unemployment rates, you end up in asituation where you put
yourself in a corner," said Wells Fargo chiefeconomist John Silvia. "Sometimes you can be too
specific and tootransparent, certainly in the uncertain world of economics."Withthe Fed essentially
dropping the 6.5 percent unemployment threshold,Bernanke signaled that he now sees greater public
transparency — alongtime priority of his as chairman — as being somewhat flawed. It alsomeans his likely
successor, Janet Yellen, will feel at liberty to showsimilar flexibility.Though the Fed will be scaling back
itsmonthly bond purchases, Bernanke called the buying of Treasurys andmortgage bonds merely a
"supplementary tool" compared with the "maintool" of the Fed’s benchmark short-term
rate.At his December 2012news conference, Bernanke had announced the 6.5 percent unemploymentthreshold as a
way to"allow the markets to respond quickly andpromptly to changes" in Fed policy and act
"like an automaticstabilizer.""We’re transparent about what’s going to determine our policy
in the future," Bernanke said then.Butover the past year, the decline in the unemployment rate to 7
percentfrom 7.8 percent hasn’t necessarily reflected a much stronger jobmarket. So Bernanke
adapted.Unemployment has fallen in partbecause the equivalent of more than 7 million Americans left
theworkforce and were no longer counted as unemployed. Some of thisreflects an aging population. Some of it
comes from a discouraged groupof Americans who can’t find jobs. All of it suggests an underlyingweakness in
the economy."We want to look at hiring, quits,vacancies, participation, long-term unemployment,"
Bernanke saidWednesday."So I expect there will be some time past the 6.5 percentbefore all of the other
variables we’ll be looking at will line up in away that will give us confidence that the labor market is
strong enoughto withstand the beginning of increases in rates."Most Fedofficials now expect
unemployment to drop to 6.5 percent by the end ofnext year, according to new projections released Wednesday.
Manyprojected that rates would increase starting in 2015 — seven years afterthe financial crisis
erupted.Secondly, more transparency has notstabilized the markets. The stock sell-off that occurred in June
afterBernanke suggested that bond purchases could soon end eventually turnedinto a rally. After the Fed
chose not to pull back on its buying at itsSeptember meeting, stocks set record highs.Instead of
stabilizingthe markets, Bernanke’s specifics had created a yo-yo effect. EconomistStanley Fischer, who
taught Bernanke at the Massachusetts Institute ofTechnology, warned that overly specific forward guidance
had madefinancial markets more volatile.A former governor at the Bank ofIsrael who is expected to be
nominated by President Barack Obama tobecome the Fed’s vice chairman, Fischer believes that rates should
bedetermined by a series of economic conditions that are hard to forecast."Wedon’t know what we’ll be
doing a year from now," he said at a Septemberconference in Hong Kong. "It’s a mistake to try and
get too precise."And, lastly, there is the trouble created by low inflation.TheFed’s dual mandate is to
maximize employment and provide stable prices.But inflation as measured by the index the Fed monitors has
been onlyabout half the central bank’s 2 percent target this year.Some Fedofficials forecast that inflation
could stay below their target through2016. The word "inflation" was mentioned 86 times during
Bernanke’snews conference.When prices are flat or even decline, consumersmight become reluctant to spend
because the costs could be cheaper aweek, a month, or even months from now. It’s a sign that demand is
tooweak to spark much growth. The Fed can pump money into the economythrough lower interest rates to keep
inflation at a reasonable level."Thereis still this question about inflation, which is a bit of a
concern,more than a bit of a concern," Bernanke said. "We take that veryseriously. And if
inflation does not show signs of returning to target,we will take appropriate action."Copyright 2013
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