Bernanke says Fed stimulus benefits clear, downplays risks
Federal Reserve Chairman Ben Bernanke strongly defended the U.S. central bank’s monetary stimulus before Congress on Wednesay, easing financial market worries over a possible early retreat from bond buys.
The Fed chairman also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a “significant headwind” for the modest economic recovery.
Bernanke said Fed policymakers are cognizant of potential risks from their extraordinary support for the economy, including the possibility that it might fuel unwanted inflation or stoke asset bubbles.
But, in testimony on the central bank’s semi-annual report on monetary policy, he said the risks did not seem material at the moment, adding the central bank has all the tools it needs to retreat from its monetary support in a timely fashion.
“To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Bernanke told the Senate Banking Committee.
In response to the financial crisis and deep recession of 2007-2009, the Fed not only slashed official interest rates to effectively zero but also bought more than $2.5 trillion in mortgage and Treasury debt in an effort to push down long-term interest rates and spur hiring. The Fed is currently buying $85 billion in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labor market.
Minutes of the Fed’s January 29-30 policy meeting, released last week, showed a number of officials felt the potential risks posed by the bond purchases could warrant tapering or ending them before hiring picks up. However, several others argued there was a danger in halting them prematurely.
Bernanke appeared to be in the latter camp. “The benefits of asset purchases, and of policy accommodation more generally, are clear,” he said, citing improvements in the housing and auto sectors and tracing them in part to the Fed’s stimulus.
“There is no risk-free approach to this situation,” he said. “The risk of not doing anything is severe as well. So, we are trying to balance these things as best we can.”
The testimony helped offset jitters in U.S. stock markets over Europe’s debt crisis, with major indexes rising in the afternoon, while bond prices fell. “What Bernanke is saying, bottom line, indicates that there will not be a reversal anytime soon in the stimulus program,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
When asked pointedly by Republican Senator Bob Corker about whether the Fed’s easy monetary policy was contributing to competitive currency devaluations globally and laying the groundwork for inflation, Bernanke was unequivocal.
“My inflation record is the best of any Federal Reserve chairman in the post-war period,” he retorted. “We are not engaged in a currency war.”
Democrats, for their part, seized on Bernanke’s remarks to fuel their argument that looming budget cuts could have a dire economic impact, as they sought to gain political advantage over Republicans, who would rather see spending cuts than higher taxes.