Federal Reserve Chairman Ben S. Bernanke defended quantitative easing, saying it has helped the economy and shows no immediate sign of creating a bubble in asset prices.
“We don’t think that financial stability concerns should at this point detract from the need for monetary policy accommodation which we are continuing to provide,” he said today in Washington at a forum sponsored by the Brookings Institution.
Bernanke said of all the concerns raised about bond buying by the Fed, the risk it could prompt financial instability is “the only one I find personally credible.” Currently, asset prices are broadly in line with historical norms, he said.
Bernanke is seeking to define his legacy before stepping down on Jan. 31. During his eight-year tenure as leader of the Fed he piloted the economy through a financial crisis that led to the longest recession since the 1930s. He has tried to bolster growth by holding the target interest rate near zero and pushing forward with unprecedented bond buying known as QE.
“Those who have been saying for the last five years that we’re just on the brink of hyperinflation, I think I would just point them to this morning’s CPI number and suggest that inflation is not really a significant risk of this policy,” Bernanke said, referring to a Labor Department report showing the consumer price index rose 1.5 percent in the past year. The Fed has set an inflation target of 2 percent.
Bernanke answered questions from Liaquat Ahamed, the author of “Lords of Finance: the Bankers Who Broke the World,” which focuses on the failure of central bankers, starting in 1929, to avert the Great Depression. Before coming to the central bank, Bernanke was a Princeton University professor who studied the causes of the Depression and the government policies most effective in bringing about its end.
Asked if the Fed’s efforts to fuel growth are creating asset-price bubbles, Bernanke said the Fed is “extraordinarily sensitive” to risks of financial market instability.
Referring to bond purchases by the Fed, he said, “it was at least somewhat effective, and given that we were at the limits of what conventional monetary policy could do, we felt that we needed to take additional steps.”
Fed officials saw diminishing economic benefits from their bond-buying program and voiced concern about future risks to financial stability during their December meeting, when they decided to cut the pace of purchases, minutes of the session showed.
Stocks fell, with the the Standard & Poor’s 500 Index retreating from a second record as bank earnings disappointed investors. The S&P 500 lost 0.1 percent to 1,845.89 by 4:30 p.m. in New York. The index climbed 30 percent last year, the best year since 1997.
The Federal Open Market Committee (FDTR) announced plans last month to reduce monthly purchases to $75 billion from $85 billion, citing improvement in the labor market. The jobless rate last month fell to 6.7 percent, a five-year low.
The FOMC will gather Jan. 28-29 to consider the next step in its strategy of gradually reducing the pace of bond buying as the economy strengthens. The minutes didn’t describe a set schedule for reductions, although “a few” officials mentioned the need for a “more deterministic path.”
Fed Vice Chairman Janet Yellen, one of Bernanke’s chief lieutenants in engineering unprecedented accommodation, won Senate approval this month as his successor beginning Feb. 1.
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