Federal Reserve Chairman Ben Bernanke won’t be pushed around by his critics.
Mr. Bernanke launched a fresh assault against the Fed’s many naysayers Monday, using an appearance in Indianapolis to counter charges that monetary policy is sowing the seeds of inflation, enabling profligate politicians and debasing the U.S. dollar. The Fed chief also dismissed the possibility that a spate of weak economic indicators – including a report last week that showed U.S. gross domestic product grew at a meagre annual rate of 1.3 per cent in the second quarter – herald a recession.
Rather, the weak data signals the economy is coasting at rate of growth that is too slow to lower the unemployment rate, justifying the extraordinary measures the Fed initiated a few weeks ago to give the economy a jolt.
“Our concern is not really a recession,” Mr. Bernanke told the Economic Club of Indiana. “Our concern is growth will continue, but at a pace that is insufficient to put people back to work.”
Mr. Bernanke and other economists reckon the U.S. economy must grow at an annual pace in excess of 2.5 per cent to put a dent in the unemployment rate, which has been stuck between 8.1 per cent and 8.3 per cent since January. The Fed has a mandate to achieve “maximum” employment, which the central bank equates to an unemployment rate closer to 5.5 per cent. After cutting its economic outlook for 2012 on Sept. 13, the Fed implemented the most aggressive round of policy stimulus since the depth of the financial crisis, initiating open-ended bond purchases and pledging to keep interest rates low well into 2015.
Many cheered; stock markets rose. But many also jeered, among them surrogates for Republican presidential candidate Mitt Romney. The Fed must take its critics seriously because maintaining confidence in its policies is vital to their efficacy. Ultimately, the Fed’s politics are designed to encourage households and businesses to spend. If the broad public loses faith in the Fed, that won’t happen. Mr. Bernanke said Monday that the economy likely will be stronger by 2015, but even still, the Fed “will take care not to raise rates prematurely,” so long as there is no threat of inflation. Talk like that infuriates the Fed’s critics, who are convinced the central bank’s policy of creating hundreds of billions of dollars to purchase Treasury debt and mortgage securities will inevitably lead to inflation. “Repeat after me: Policies to inflate slow growth. Period,” Keith McCullough, chief executive of research firm Hedgeye, said in a note to clients Monday.
Mr. Bernanke explained in Indianapolis that the Fed isn’t exactly flooding the U.S. economy with cash. When the Fed buys financial assets, it creates credits on the balance sheets of private banks, which have been loath to lend too freely. The money supply has not “grown especially quickly, on balance, over the past few years,” Mr. Bernanke said. And if it does, Mr. Bernanke reiterated that the Fed has the tools to vacuum money out of the financial system. He specifically mentioned raising the rate the central bank pays private lenders to deposit funds at the Fed. Mr. Bernanke also confronted those who say the Fed should allow higher interest rates to force lawmakers to take the budget deficit more seriously.
“Using monetary policy to try to influence the political debate on the budget would be highly inappropriate,” Mr. Bernanke said flatly. But he also questioned the premise of the critique, suggesting higher interest rates now would choke what little life exists in the recovery.
“It seems likely that a significant widening of the deficit – which would make the needed fiscal actions even more difficult and painful – would worsen rather than improve the prospects for a comprehensive solution,” Mr. Bernanke said.