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THE FED
Frank asks Bernanke why easing rates is off table
WASHINGTON (MarketWatch) -- The senior Democrat on the House Financial Services panel wasted little time challenging Federal Reserve Chairman Ben Bernanke on Thursday, challenging him why he was sending a message "stop me before I tighten again."
House Financial Services Chairman Barney Frank, D-Mass., asked Bernanke why a rate cut "wasn't at least as likely" as a rate hike in coming months.
Frank said the economy is running below potential and inflation was falling.
"Why is there not at least an equal chance of a reduction in the time ahead," Frank said.
Since August, the Fed has maintained a formal stance that inflation is the biggest risk facing the economy - a so-called inflation bias. Bernanke repeated this position in his Wednesday's Senate appearance, saying that inflation was the "predominant" risk and the Fed stood ready to hike rates if inflation developments warrant. See full story.
In response, Bernanke said "there were risks in both directions" with housing as a major downside risk, but strong spending as an upside risk.
"The economy may be stronger than we think," Bernanke said. This could put upward pressure on prices.
"In order for this expansion to continue in a sustainable way, inflation needs to be well-controlled," Bernanke said.
Frank has taken the unusual step of holding a two-day hearing on the semiannual monetary-policy report, with several critical economists scheduled to testify to the committee on Friday. See full story.
Frank joked that the news media has overstated his dissatisfaction with the Fed.
"I have less to complain about then they might have hoped, [but] I'm sure quarrels will arise so they should not lose hope," Frank said.
Frank has expressed his opposition to any move by the Fed to abandon its statutory goal of full employment in favor of an inflation target. Bernanke's known to favor an explicit inflation target, but he has not yet pushed the FOMC to adopt one.
Congress has given the Fed two goals, stable prices and full employment. Frank told Bernanke he was concerned that inflation targets would push the Fed to pay more attention to stable prices, downplaying the importance of full employment.
"You have two children and you love them both. But I'm afraid that one of them might get a little more for Hanukkah than the other, if we are not careful," Frank said.
Fed officials have said repeatedly that price stability's a prerequisite for full employment. In the long run, they say, the central bank cannot encourage greater job growth by allowing more inflation.
Globalization
There is a growing debate in Congress over the wisdom of U.S. policy favoring free trade.
Many House Democrats believe the middle class is not receiving any benefits from the new global economy. These concerns are loosely called neo-populism.
"My constituents are not feeling optimistic. They feel the economic expansion has not ended up in their take-home pay," Rep. Carolyn Maloney, Democrat of New York, told Bernanke.
In response, the Fed chairman said Washington should do more to help to assist workers who are dislocated by changes in the global economy. Education and training are critical, he said.
"I think it is very important that we not respond to those dislocations by saying we are going to stop trade and stop technological improvement. That is really doing more harm than good," Bernanke said.
Frank said there is a policy deadlock in Congress over free trade issues and President Bush's two major trade goals, an extension of fast-track authority and a Doha global trade deal, are in jeopardy.