Federal Reserve Chairman Ben S. Bernanke defended his expansion of record monetary stimulus in a meeting with Senators as top Republican lawmakers stepped up their criticism of the central bank chief’s policies.
Bernanke, in a closed-door meeting yesterday, said the Fed’s plan to buy $600 billion in assets would spur job growth while keeping inflation under control. John Boehner, the presumptive House speaker, and three other Republicans sent Bernanke a letter expressing “deep concerns” about a policy they said risked weakening the dollar and fueling asset bubbles.
Bernanke spent months preparing financial markets for the second round of stimulus, which was announced Nov. 3, the day after elections that gave Republicans control of the House of Representatives on a wave of anti-government sentiment. St. Louis Fed President James Bullard said the Fed might have done a better job explaining how its policies differ from federal rescues of financial institutions.
“What is really only ordinary monetary policy got conflated, I think, with other kinds of government programs, bailout programs,” Bullard told reporters yesterday after a speech in St. Louis. “It is up to us to try to communicate better about monetary policy.”
Strength of Dollar
“While intended to improve the short-term growth of the U.S. economy and help maintain a stable price level, such a measure introduces significant uncertainty regarding the future strength of the dollar,” the letter said. The purchases could “result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles.”
Mark Calabria, a former aide to Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, said the letter indicates congressional leaders are seizing on an issue important to their political base. McConnell made a similar calculation this week by dropping his opposition to banning budget “earmarks” for lawmakers’ pet projects, Calabria said.
“They are responding to what they believe are some of the Tea Party and Republican concerns,” said Calabria, now director of financial regulation studies at the Cato Institute in Washington, a policy research group that favors free markets. “They’re sensing that the Fed and Bernanke are not very popular right now.”
Sarah Palin, the 2008 vice-presidential candidate who helped propel some Republicans to election victories this year, today renewed her criticism of the Fed in a letter to the Wall Street Journal.
“It’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems,” wrote Palin, who said in New York Times and ABC News reports this week that she’s considering a 2012 run for president.
The difference between yields on 2-and 10-year Treasury notes widened after yesterday’s Republican criticism. The difference between yields on 2- and 10-year debt rose to 2.39 percentage points and was near the 2.45 percentage points it touched the previous day, the highest since July 16.
Yields on the longer-maturity debt are rising faster as investors demand a greater premium against the risk that Fed officials won’t be able to control increases in inflation after completing the asset purchases.
Yesterday’s letter from top Republicans came in a week in which 23 people, including former Republican government officials and economists, urged Bernanke to halt the stimulus, while Republican lawmakers proposed stripping the Fed of its mandate to promote full employment.
Republicans “don’t trust the Fed and see it as rewarding the bad behavior of the opposition,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and a former Fed board division director.
The central bank’s second round of asset purchases works out to about $110 billion a month through June because the New York Fed is also reinvesting proceeds from Fed holdings of maturing mortgage debt. That about covers what bond dealers estimate will be the Treasury’s monthly financing needs next year.
“Monetizing the deficit now facilitates and doesn’t address the problem” in Republicans’ view, Reinhart said.
Bear Stearns Rescue
The Republican attacks are among the harshest since the Fed rushed to rescue the financial system with support for Bear Stearns Cos. and American International Group Inc. during the financial crisis.
Bernanke, at the Senate meeting, said that he and his colleagues “remain absolutely committed to not letting inflation or inflationary expectations get out of control,” Senator Evan Bayh, an Indiana Democrat, told reporters after the 40-minute session.
The Fed chief told senators that central bank officials “want to do what they can now to encourage more growth rather than less,” Bayh said. The second round of purchases followed a previous $1.7 trillion bond-purchase program. Economists call the strategy quantitative easing because it aims to increase the quantity of bank reserves.
Focus on Inflation
Senator Bob Corker of Tennessee and Representative Michael Pence of Indiana are proposing legislation that would remove the Fed’s full-employment mandate and have the central bank focus on inflation alone.
“The Federal Reserve hasn’t gotten the message,” Pence said on the House floor yesterday. “Printing money is no substitute for sound fiscal policy.”
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, came to Bernanke’s defense, telling reporters that his performance has “been very helpful” and “staved off much worse activity.”
“They’ve got to use the tools of monetary policy to help us lower the unemployment rate,” said Senator Bernard Sanders, a Vermont Independent, in a separate meeting with reporters. “I don’t think we are going to surrender that. I will not support surrendering that.”
Bernanke’s formation as a young economist is book-ended by the two disasters in Fed history -- the Great Depression and the inflation of the late 1970s. Bernanke, 56, has also pioneered research with New York University Professor Mark Gertler that showed how financial crises can accelerate downturns, and he was critical of the Bank of Japan for not responding more forcefully to deflation.
“The disaster they want to avoid now is becoming like Japan,” Gertler said in an interview yesterday. “Republicans don’t understand the risks of deflation. The economy is weak right now so there is a risk that expectations of falling prices set in, and that is going to raise real interest rates.”
Still, hostility toward the Fed is strong among Republican voters and especially followers of the Tea Party, a loose collection of activists who want to curb government power. Forty-one percent of Republicans and 55 percent of Tea Party supporters believe the Fed should be abolished or radically overhauled, according to a Bloomberg National Poll conducted Oct. 7-10.
James Galbraith, an economist at the University of Texas at Austin, said the ultimate loser of a single-mandate Fed would be Congress, which would no longer be able to engage the central bank on such critical issues as growth and jobs.
“To say that you should focus on inflation and not unemployment is a little strange,” said Galbraith, who helped write the Humphrey-Hawkins Full Employment Act of 1978, which enshrined the Fed’s dual mandate to seek stable prices and full employment. “This is a warning shot by a couple of senators who know very well that they are not going to get a bill entertained.”
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