Bernanke Defends Bond Purchases, Predicts Stronger Growth
Federal Reserve Chairman Ben S. Bernanke said the central bank must focus on the U.S. rather than overseas economies when trying to spur the recovery by purchasing an additional $600 billion in Treasuries.
“Our first objective, the first goal that we have, is to meet our mandate to get price stability and maximum employment in the United States,” Bernanke said yesterday in response to questions from college students in Jacksonville, Florida. “A strong U.S. economy, a recovering economy, is critical not just for Americans but it’s also critical for the global recovery.”
Bernanke came under fire yesterday from officials in Germany, China, and Brazil, who said his plan to pump cash into the banking system may jar other economies and fail to fuel U.S. growth. Critics including Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, have said Fed policy is encouraging investors to take on too much risk and threatens to undermine the dollar.
“It’s our problem as well if the U.S. is no longer certain that the old recipes don’t work anymore,” German Finance Minister Wolfgang Schaeuble said yesterday in Berlin. The Fed’s injection of $600 billion was “clueless” and won’t revive growth, he said.
Brazil’s central bank president, Henrique Meirelles, said “excess liquidity” in the U.S. economy is creating “risks for everyone.” In China, Vice Foreign Minister Cui Tiankai said “many countries are worried about the impact of the policy on their economies.” He also said the U.S. “owes us some explanation on their decision on quantitative easing.”
Stocks capped their best week in two months, with the MSCI World Index and Standard & Poor’s 500 Index up more than 3.4 percent each, after the Fed pledged on Nov. 3 to buy as much as $600 billion of Treasuries through June to boost the economy.
“We are showing insufficient stimulus,” Bernanke said yesterday in his remarks, mostly in response to questions. Asset purchases have “the goal of reducing interest rates, providing more stimulus to the economy and, we hope, creating a faster recovery and an inflation rate consistent with long-run stability,” Bernanke said to students.
An acceleration of U.S. economic growth would support the value of the U.S. dollar, Bernanke said.
“The best fundamentals for the dollar will come when the economy is growing strongly,” Bernanke said yesterday. “That is where the fundamentals come from. We are aware the dollar plays a special role in the global economy.”
The dollar advanced 1.1 percent to $1.4049 per euro at 3:08 p.m. in New York from $1.4207 yesterday, when it touched $1.4282, the weakest level since January.
Bernanke said additional easing will help the Fed achieve its two mandates set by Congress for ensuring full employment and stable prices.
“The unemployment rate, if at all, is coming down very, very slowly,” Bernanke told students at Jacksonville University. “Inflation is very, very low, probably below the level that is healthy for the economy in the longer term.”
Bernanke will have the opportunity to elaborate on his comments today when he is scheduled to speak to an Atlanta Fed conference at Jekyll Island, Georgia.
The Fed is purchasing more Treasuries to reduce 9.6 percent unemployment and keep inflation from slowing. Bernanke is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing joblessness down from close to a 26-year high.
Referring to the policy of so-called quantitative easing, Bernanke said, “we will be reviewing that regularly to see if it is working, to see how the outlook is changing.”
The Fed’s support for asset values isn’t helping the “real” economy, and is creating “dangerous signs of a potential free fall” in the dollar and will be unsustainable, Burry said in an interview.
Hedge-fund manager Barton Biggs is among those who defended Bernanke.
“We still are in a very precarious situation,” Biggs, the managing partner of New York-based Traxis Partners LLC and former chairman of Morgan Stanley Asset Management, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The economy could easily tip back into a double dip, and Bernanke did what he had to do.”
The U.S. added 151,000 jobs last month, Labor Department figures showed yesterday, exceeding all forecasts in a Bloomberg News survey of economists. Private payrolls that exclude government agencies also gained more than forecast, while the jobless rate held at 9.6 percent.
Asked by a student if “skyrocketing” commodities prices may threaten his inflation outlook, Bernanke said rising commodities prices are “the one exception” to a broad reduction in inflationary pressures. Overall, excess slack in the economy will make it difficult for producers to push through higher prices to consumers, he said.
“Emerging markets are growing quite quickly,” Bernanke said. “Demand for those commodities is pretty strong. That is going to be a contributor to inflation in the U.S. because it will affect gas prices, for example, and so on.”
Asked by a student about rising gold prices and concerns over inflation, Bernanke said the Fed wouldn’t sacrifice price stability in an attempt to boost growth.
“Let me be very clear: We are absolutely committed to keeping inflation low and stable,” he said. “We have the tools to unwind and tighten policy at the appropriate time. We will honor both sides of our dual mandate.”
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