Don’t call Ben Bernanke a dove.
Or at the very least, don’t call him the “biggest dove, if you will, since World War II,” as Republican senator Bob Corker did on Tuesday, adding that “I think it’s something you’re rather proud of.”
It was hardly the first time Mr. Bernanke had been tweaked by a lawmaker. But this one got to him. The U.S. Federal Reserve chairman visibly bristled, showing a rare flash of temper beneath his typically placid outward shell.
“You called me a dove,” said Mr. Bernanke, repeating the Wall Street slang for a policy maker who is perceived to be soft on inflation.
“Maybe in some respects I am, but my inflation record is the best of any Federal Reserve chairman in the post-war period, or at least one of the best, at about 2 per cent.”
Mr. Bernanke’s dovehood is once again an important question in financial markets.
Stocks suddenly dropped last week when minutes of the Fed’s January policy meeting showed officials are increasingly concerned that their experiment in expansionary monetary policy could be creating unforeseen dangers. There was considerable talk at the Federal Open Market Committee of “tapering” the Fed’s purchases of financial assets, if not ending quantitative easing altogether, by the end of the year.
Investors, with an eye on forecasts that suggest the U.S. economy will do well to exceed economic growth of 2 per cent this year, are keen for the Fed to keep the stimulus throttle open. At the same time, Mr. Bernanke must contend with the Bob Corkers of the world, who think the Fed has set the U.S. economy on a course to ruin.
“The Fed is purchasing a large portion of debt as we live beyond our means,” Mr. Corker told Mr. Bernanke at a hearing of the Senate Banking Committee.
“I wonder if you all talk at all about the degrading effect that is having on our society,” he added, contending that low interest rates are hurting savers, and “throwing seniors under the bus.”
Mr. Bernanke was speaking to senators, but quite likely the more important audience were those equity investors.
The Fed chief made no attempt to hide the fact that policy makers are wary of the unintended consequences of bond buying.
The central bank has compiled a portfolio of Treasury securities and mortgage-backed securities worth an unprecedented $3-trillion (U.S.). The Fed has created new money to purchase those assets, risking inflation by flooding the financial system with cash and asset-price bubbles by pushing yield-hungry investors into riskier bets.
“We are having this debate in public,” Mr. Bernanke said. “We want everyone to understand that we are looking at these issues.”
And so far, all that looking has reassured Mr. Bernanke that the Fed is on the right path.
He reiterated that he’s confident the Fed can shrink its portfolio back to a more manageable level without disrupting financial markets. The benefits of quantitative easing are “clear,” he said, providing “important support” for an economy still struggling to create jobs at a pace fast enough to lower the unemployment rate. He said the labour market is improving “gradually,” which differs starkly from the Fed’s promise to remain aggressive until it detects “substantial” improvement in hiring.
Wall Street analysts were reassured that the Fed will keep borrowing costs lower for longer. Bank of Montreal economist Sal Guatieri advised his clients after Mr. Bernanke’s testimony that the Fed would keep buying assets at a pace of $85-billion a month for “most, if not all, of 2013.” Paul Edelstein of IHS Global Insight said the Fed would keep buying assets into 2014.
Of course, critics such as Mr. Corker – those who think the Fed’s policies are “degrading” American society – are more difficult to please. But Mr. Bernanke had a message for them, too.
“We are trying to achieve a stronger economy for everybody,” he said, adding that higher interest rates would crush the recovery.
“Our economy is not strong enough to sustain high real returns to savers. To do that, we would throw our economy back into recession and we would have low interest rates like the Japanese do. The only way to get interest rates up for savers is to get a strong recovery. And the only way to get a strong recovery is to provide adequate support to the recovery.”