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Bernanke defended the move, suggesting that pegging Fed policy to labor market conditions (the Fed set a target of 6.5 percent U-3 unemployment, which currently sits at 7.9 percent) and long-term interest rates (no more than 0.5 percent above the long-term goal of 2 percent inflation) allows market participants to more accurately and frequently update their monetary policy expectations.
“With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy,” Bernanke wrote in his testimony. “Under normal circumstances, policy accommodation would be provided through reductions in the FOMC’s target for the federal funds rate–the interest rate on overnight loans between banks. However, as this rate has been close to zero since December 2008, the Federal Reserve has had to use alternative policy tools.”
It’s these other tools that were the focus of much of the questioning Bernanke faced, as well as the national conversation concerning whether or not the Fed’s policy is worth the risk…
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