Focus On The Fed

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Fed Defends Stimulus in Testimony to Senate
By BINYAMIN APPELBAUM

WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, played down concerns about the Fed’s economic stimulus campaign on Tuesday, describing it as necessary and effective and making clear it was likely to continue for some time.

In testimony before the Senate Banking Committee, Mr. Bernanke was relatively upbeat about the broader economy, which he said was growing again after pausing in the fourth quarter. But he said unemployment remained unacceptably high.

“In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear,” Mr. Bernanke said. “Monetary policy is providing important support to the recovery” even as inflation remains in check.

The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent.

Other Fed officials unsettled some investors in recent weeks by raising concerns that the Fed was encouraging excessive risk-taking, or that it would be difficult to unwind the extensive purchases, which might lead the central bank to pull back. Mr. Bernanke’s remarks appeared to soothe those concerns. Stocks rose as he spoke, and stayed up. The Standard & Poor’s 500 index climbed 0.61 percent on the day.

Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, wrote that the testimony amounted to a “robust defense” of the aggressive efforts by the Federal Open Market Committee that “gives no ground to those within and without the F.O.M.C. who think asset purchases will soon need to be curtailed.”

The reception on Capitol Hill was frostier, as several Republican senators challenged Mr. Bernanke’s assertion that the purchases were producing clear economic benefits, and questioned the potential costs. Senator Bob Corker, a Tennessee Republican, drew Mr. Bernanke into an unusually sharp exchange.

Mr. Corker, asserting that low interest rates were “throwing seniors under the bus,” by reducing returns on some kinds of investments, asked Mr. Bernanke, “Do you all ever talk about the longer-term degrading effect of these policies?”

“One thing we talk about is unemployment,” Mr. Bernanke responded. He added that the best way to increase interest rates was to increase growth.

Mr. Corker then accused Mr. Bernanke of insufficient concern about potential inflation, saying, “I don’t think there’s any question that you would be the biggest dove since World War II,” using the term “dove” to denote a Fed official who is more concerned about unemployment than higher inflation.

Mr. Bernanke, clearly piqued, responded, “You call me a dove, but my inflation record is the best of any chairman in the postwar period.”

The Fed chairman was more measured on the subject of asset bubbles.

Jeremy C. Stein, a member of the Fed’s Board of Governors, and some other Fed officials have expressed concern in recent months that low interest rates were encouraging excessive risk-taking by investors pursuing higher returns. Mr. Stein in a recent speech highlighted rising demand for junk bonds and certain kinds of real estate investments, and shifts in bank balance sheets, as areas of potential concern.

Mr. Bernanke said the Fed took these concerns “very seriously,” noting that the central bank had significantly expanded its efforts to monitor financial markets, as well as giving greater priority to financial regulation.

But he said that low interest rates also were helping to strengthen the financial system, by encouraging companies to increase reliance on long-term financing, allowing debt levels to decline and fostering growth.

He added that he saw no reason to consider a change in course.

“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,” Mr. Bernanke said.

He also played down the concern expressed by some Fed officials and analysts that the central bank’s plans to control inflation as the economy recovers could be complicated by a political penalty because it may lose money as it sheds some of its vast holdings of Treasuries and mortgage bonds.

Such losses could be large enough to prevent the Fed from transferring profits to the Treasury Department for the first time since 1934, according to a Fed analysis.

Mr. Bernanke, noting that the Fed had transferred $290 billion to Treasury since 2009, said it was “highly likely” Treasury still would see a net benefit from the purchases because any losses would not exceed those profits.

“Moreover,” he said, “to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury.”

Much of the hearing focused on fiscal policy as Mr. Bernanke renewed his warning that short-term spending cuts have become a major impediment to faster growth. He urged Congress to make cuts more gradually.

Several senators vainly pressed Mr. Bernanke to agree that the economic impact could be reduced by calibrating the cuts without altering the pace.

“The near-term effect on growth would not be substantially different,” he said, although he eventually agreed that there might be modest benefits.

He even offered senators a little pep talk. “I know that you’re trying,” he said, “and I hope you can find the agreement to achieve these important objectives.”

http://www.nytimes.com/2013/02/27/business/economy/fed-chairman-defends-stimulus-efforts.html?ref=politics&pagewanted=print