Bernanke Says He Won’t Tolerate Higher Inflation to Boost Employment Gains

Federal Reserve Chairman Ben S. Bernanke defended the central bank’s newly established price goal and rejected suggestions he was prepared to allow higher inflation to create jobs.

“We are not seeking higher inflation,” Bernanke said yesterday in response to questioning from Republican Representative Paul Ryan of Wisconsin, chairman of the House Budget Committee. “We do not want higher inflation and we’re not tolerating higher inflation.”

Bernanke replied to Ryan’s suggestion that the Fed might be prepared to allow inflation to exceed its goal to fulfill the second part of its congressional mandate, which is to promote maximum employment. The Fed last week set a 2 percent annual inflation goal after saying that it would keep its benchmark interest rate low for longer to boost the economy and push down unemployment.

Ryan, who has supported legislation to have the Fed focus solely on stable prices, said in opening remarks he was “greatly concerned to hear the Fed recently announce that it would be willing to accept higher-than-desired inflation in order to focus on the other side of its dual mandate.”

The hearing came one day before a report from the Labor Department that’s forecast to show that the jobless rate stayed at 8.5 percent in January, according to the median estimate in a Bloomberg News survey of economists. Employers probably added 140,000 jobs to payrolls, down from an increase of 200,000 in December, according to the survey.

Signs of Improvement

In other remarks yesterday, Bernanke said the economy has shown signs of improvement while remaining vulnerable to shocks, and he called on lawmakers to reduce the long-term U.S. budget deficit.

“To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time,” Bernanke said.

The Standard & Poor’s 500 Index advanced 0.1 percent to 1,325.54 at the close of trading in New York yesterday. The yield on the 10-year Treasury note was little changed at 1.82 percent.

In adopting an inflation target, the Fed joined central banks from Sweden to New Zealand that have such goals. The exchange between Ryan and Bernanke turned on the wording of a statement last week explaining how the Federal Open Market Committee might reconcile its inflation target with maximum employment.

Balancing Objectives

“I don’t think you should read into this any unwillingness to keep price stability as a critical goal of the central bank,” Bernanke, 58, said. “In looking at the two sides of the mandate, the rate of speed, the aggressiveness, may depend to some extent on the balance between the two objectives.”

“We are always trying to return both objectives back to their mandate,” he said.

Fed policy makers see inflation declining in 2012 to below their 2 percent target, with most expecting prices to rise 1.4 percent to 1.8 percent this year, according to forecasts released last week. That gives them more leeway to take action aimed at lowering unemployment.

“If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then the logic of our framework says we should be looking for ways to do more,” Bernanke said at a Jan. 25 press conference.

Price Gauge

The price gauge preferred by the Fed, the personal consumption expenditures index, increased 2.4 percent in December from a year earlier, down from 2.6 percent the previous month. The pace of so-called core inflation, which excludes food and energy, increased to 1.8 percent in December from 1.7 percent the month before.

Chicago Fed President Charles Evans said yesterday that the central bank should consider additional purchases of Treasuries and mortgage bonds to boost the economy.

People outside the Fed have “mentioned that maybe you needed to do well over $1 trillion in asset purchases in order to begin to move things,” the regional chief told reporters during a meeting at the Chicago Fed. “I don’t have a particular number in mind, but it would be more ambitious than most numbers being bandied about.”

Evans, who doesn’t vote on monetary policy this year, dissented from the November and December decisions of the FOMC, favoring additional monetary stimulus at those meetings.

The central bank has kept interest rates close to zero since December 2008 and expanded its balance sheet by buying $2.3 trillion in bonds.

‘Greater Latitude’

“To the extent that inflation is running below 2 percent, the Federal Reserve may have somewhat greater latitude to pursue accommodation,” Dallas Fed President Richard Fisher said in a speech in Austin, Texas yesterday. “However, the past few years have demonstrated, yet again, that allowing inflation to rise by no means guarantees faster job growth.”

Reports indicating strength in the labor market, manufacturing and construction spending helped drove the S&P 500 up 4.4 percent last month for the best January since a 6.1 percent increase in 1997, according to data compiled by Bloomberg.

Applications (INJCJC) for unemployment insurance payments dropped by 12,000 to 367,000 in the week ended Jan. 28, Labor Department figures showed yesterday. Manufacturing in the U.S. grew in January at the fastest pace in seven months, according to a report this week from the Institute for Supply Management.

Even so, “the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed,” Bernanke said. “Moreover, the sluggish expansion has left the economy vulnerable to shocks.”

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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

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