Bernanke's Call for Deficit Plan Tempers Republican Criticism of Stimulus

Federal Reserve Chairman Ben S. Bernanke’s calls for an immediate plan to control U.S. debt are winning praise from some of the same Republican lawmakers who rebuked him for the central bank’s record monetary stimulus.

Texas Representative Jeb Hensarling said he welcomes the Fed chief’s “more enthusiastic” voice on fiscal policy. House Budget Committee Chairman Paul Ryan is invoking Bernanke’s credibility to gain support for his budget-cutting proposal.

The shift may give Bernanke, 57, more room to extend two years of near-zero interest rates after finishing $600 billion of bond buying aimed at reducing unemployment. Republicans who took control of the House in November’s elections and narrowed the Democrats’ Senate majority will question Bernanke today and tomorrow during two days of semiannual testimony on monetary policy.

Bernanke is gaining “a little bit more credibility with the Republicans on these committees,” said James Kochan, who helps oversee $232 billion as chief fixed-income strategist at Wells Fargo Funds Management LLC in Menomonee Falls, Wisconsin. “It is a serious macroeconomic problem, and Congress is grappling with it, and to the extent that he provides some ammunition for the Republicans perhaps, that might be a good strategy.”

Bernanke is scheduled to begin the hearings at 10 a.m. today in Washington with a visit to the Senate Banking Committee. The House Financial Services Committee hosts the Fed chief on March 2 at the same time.

Curbing Deficit

The former Princeton University economist has made reining in the deficit, projected to reach $1.6 trillion this year, a central theme of congressional testimony and other remarks this year.

In a Feb. 3 speech in Washington, Bernanke said “acting now” to adopt a plan to control the debt and the projected surge in health-care costs “would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence.”

Lawmakers said they plan to press Bernanke on prospects for inflation, how the monetary stimulus is working and how the Fed will exit from it. Republicans, including Hensarling and Ryan, haven’t tempered their criticism of the Fed’s second round of quantitative easing, saying it risks asset-price bubbles and an inflation surge.

“I’m not a fan of QE2,” Hensarling, the fourth-ranking House Republican, said in an interview during a brisk walk through the hallways of Capitol Hill. “I do not believe the economy today has a challenge that monetary policy can address in the short term. So I very much admire the chairman, I admire much of his work, but I fundamentally disagree with QE2.”

Stocks Gain

Fed officials have said the asset purchases have helped boost financial markets. The Standard & Poor’s 500 Index has increased 10.8 percent since Nov. 3, when policy makers announced their plan to buy $600 billion in Treasury securities through June to raise too-low inflation, spur growth and reduce unemployment.

The political pressure makes it difficult for Bernanke to consider additional bond buying to reduce the jobless rate, which has stayed at 9 percent or higher since May 2009, said Greg Valliere, chief political strategist at Potomac Research Group in Washington.

“Bernanke has to end QE2 in June,” Valliere said. “If he announced that there was going to be a QE3, he’d get significant political opposition.”

The Fed may delay raising its benchmark interest rate until the middle of 2012 instead of earlier in the year, as traders anticipate, said Bob Michele, who manages $105 billion in fixed- income assets for J.P. Morgan Asset Management in New York.

Record Lows

With inflation at record lows as measured by the Fed’s preferred gauge and budget cuts at the national and local level set to pare government spending, Bernanke is likely to brush off concerns that prices will spiral out of control.

“The Fed may need to keep rates lower for longer as some of the fiscal drag in the end of this year and early next year starts to hit,” said Eric Pellicciaro, who helps oversee $1.4 trillion as head of global rates investments at BlackRock Inc. in New York. “I’m sure he’s got that in his models and in his thought process.”

The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, down from a previous estimate of 3.2 percent, as state and local governments made deeper cuts in spending, according to a Feb. 25 Commerce Department report. Excluding inventories, the economy grew at a 6.7 percent pace, the most since 1998.

Services Expand

Reports last month from the Institute for Supply Management showed service industries in the U.S. expanded in January at the fastest pace since August 2005, while manufacturing grew by the most since 2004. The Bloomberg Consumer Comfort Index climbed in the week through Feb. 20 to the highest level since April 2008 as Americans grew less pessimistic about their finances.

Bernanke, a Republican nominated in 2005 by then-President George W. Bush, isn’t alienating Democrats even as he gains favor with some Republicans. He won Senate confirmation to a second term by a 70-30 margin in January 2010, with Republicans accounting for 18 of the “nay” votes.

The Fed chief is “playing to Democrats and Republicans” with his deficit remarks, said New York Representative Carolyn Maloney, the No. 3 Democrat on the Financial Services Committee. “We all realize that we have to attack this deficit and debt, and the question is how you do it and the timing of it,” Maloney said.

Bernanke has focused on meeting with top Republican lawmakers during the past few months.

Breakfast Host

He hosted senior congressional Republicans, including Ryan and new Financial Services Committee Chairman Spencer Bachus of Alabama, for breakfast four times in his private Fed dining room over November, December and January, according to Bernanke’s daybook provided to Bloomberg News.

Bernanke visited another four Republicans, including South Dakota Senator John Thune and House Oversight Committee Chairman Darrell Issa, in their Capitol Hill offices during the same period. By comparison, he met with one Democrat, Montana Senator Max Baucus, who had breakfast with the chairman at the Fed in December.

The mixed opinions of Bernanke extend to the class of freshman Republicans. Representative Todd Rokita, a first-term Republican from Indiana, challenged Bernanke at a Feb. 9 House Budget Committee hearing over whether the Fed has a historical record of keeping inflation in check.

‘He’s Wrong’

“I just think he’s wrong” when Bernanke says the Fed has a record of reversing stimulus in time to control inflation, Rokita said in an interview. At the same time, “his repeated call for a long-term, adult-driven plan is a lot of what this freshman class is about,” said Rokita, 41, Indiana’s former secretary of state.

Even Senator Mike Johanns, a Nebraska Republican and former agriculture secretary who has supported Bernanke, said he’s concerned about the effects of QE2. “I see signs of inflation popping up all over,” especially in commodities, said Johanns, who worked with Bernanke when he was chairman of Bush’s Council of Economic Advisers in 2005.

JPMorgan’s Michele said Bernanke is succeeding in stepping around the criticism of the asset purchases and getting the economy growing.

“He’s done a very good job of ignoring the noise and sticking to the road map,” Michele said. “You can’t argue with the results. The recovery is proceeding and strengthening.”

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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