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Bernanke Defends Fed Stimulus in Closed-Door Talk With Senators

Federal Reserve Chairman Ben S. Bernanke
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Stephen Morton/Bloomberg

Nov. 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke met with U.S. senators today to defend his expansion of record monetary stimulus, saying it would aid job growth and the central bank would control any inflation.

Bernanke 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 closed-door session on Capitol Hill.

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 program.

Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, said Bernanke cited an estimate that the program may help create 700,000 to 1 million jobs. Bernanke met with about 11 committee members amid a Republican backlash against the Nov. 3 decision by U.S. central bankers to buy an additional $600 billion of Treasury debt.

“He basically defended his position,” Shelby, who has expressed concern about the Fed action, told reporters.

Separately today, the four top Republicans in Congress wrote to Bernanke expressing “deep concerns” over the central bank’s second round of Treasury bond purchases. The action may introduce “significant uncertainty” on the dollar’s strength while generating “hard-to-control, long-term inflation” and asset bubbles, the letter from Senate Republican Leader Mitch McConnell and three other lawmakers said.

‘Marginal Impact’

Senator Mike Johanns, a Nebraska Republican, said of the Fed’s purchases that he thinks the “effect of what they are trying to do has at best a marginal impact.” As for Bernanke, “he’s hopeful that it will have more impact than I believe it will have,” Johanns told reporters after the meeting.

Johanns said he told Bernanke that the Fed runs the risk of putting too much cash into markets, which will fuel commodity prices and create “boom-and-bust” cycles. The result of Fed action could be “over-inflating parts of the economy,” Johanns said.

Johanns credited Bernanke with responding to criticism well. “He’s been very good at trying to reach out, I mean, probably better than anybody in the administration,” said Johanns, who was secretary of agriculture in George W. Bush’s administration while Bernanke was chairman of Bush’s Council of Economic advisers in 2005.

Economists such as Douglas Holtz-Eakin, former Congressional Budget Office director, and John Taylor, a Stanford University professor and former Treasury undersecretary, said the Fed program should be “discontinued” in an open letter to Bernanke Nov. 15.

‘Out of His Way’

Bernanke reiterated his view that the central bank needs help from Congress in aiding the economy. “He went out of his way to say that he absolutely hopes Congress will take the lead in setting economic policy,” Bayh said.

Bayh said measures of market-based and consumer inflation expectations show little anticipation of price increases now. The Fed chairman had the benefit of weak inflation data today to explain his position.

The consumer-price index increased 0.2 percent in October, less than forecast by economists, after a 0.1 percent rise the prior month, the Labor Department said today in Washington.

Excluding food and fuel, so-called core costs increased 0.6 percent from October 2009, the smallest gain on record. U.S. housing starts fell 12 percent last month to a 519,000 annual rate, the fewest since a record low reached in April 2009, the Commerce Department said today.

To contact the reporters on this story: Craig Torres in Washington.

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

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