Federal Reserve Chairman Ben S. Bernanke signaled he’ll push forward with further expansion of monetary stimulus if needed, resisting pressure from Republicans concerned that he’s fanning inflation.
Bernanke said yesterday in testimony to Congress’s Joint Economic Committee that the Fed is “prepared to take further action as appropriate” after using unconventional tools to boost growth in August and September. He rejected comments by Senator Jim DeMint of South Carolina and Senator Mike Lee of Utah that record central bank stimulus has spun inflation and the money supply out of control.
Some Republicans are trying to remove the half of the Fed’s congressional mandate to achieve “maximum employment,” focusing it only on keeping inflation low. Representative Mick Mulvaney said the Fed chief could legitimately push ahead with more stimulus so long as he keeps price increases in check.
“Doing so, given his dual mandate, is completely defensible despite our objections,” Mulvaney, a first-term Republican who represents the town of Dillon, South Carolina, where Bernanke grew up, said in an interview after the hearing. “Because how are we supposed to say, ‘Look, inflation is killing us,’ when it’s not, yet?”
The Fed’s preferred price index, the personal consumption expenditures index, excluding food and fuel, rose 1.6 percent in August from a year earlier, up from 1 percent in March. The index including all prices rose 2.9 percent in August, compared with 2 percent in March.
Oil Price Jump
Bernanke, 57, said in his testimony that price increases “have begun to moderate” after a jump in oil costs earlier this year resulted in higher prices for gasoline and food. Faster inflation this year “does not appear to have become ingrained in the economy,” he said, and cited a recent decline in what traders expect for inflation.
A measure of inflation expectations for five to 10 years out, based on a 2008 Fed research paper, declined to 2.16 percent on Sept. 30, the most recent date available, from 2.79 percent at the end of August.
Top Republicans, including House Speaker John Boehner of Ohio, sent Bernanke a letter last month urging the central bank to avoid further monetary easing. Also in September, Representative Barney Frank of Massachusetts, the senior Democrat on the House Financial Services Committee, renewed his push to strip regional Fed presidents of their vote on interest-rate policy after three regional chiefs dissented from the Fed’s August easing.
Utah’s Lee told Bernanke that “most Americans believe, correctly I think, that the prices of products and services they buy on a daily basis, things like gasoline, electricity, heating oil, health-care services, have increased significantly in recent years and have grown more volatile.”
‘Essentially Price Stability’
Bernanke responded that inflation has come down over the last 30 years and during his tenure has been “about 2 percent, which is essentially price stability.”
“So I think the record on price stability has been very, very good actually,” he said.
South Carolina’s DeMint said during the hearing that the Fed’s stimulus has caused an “exponential increase in monetary supply relative to the growth of the economy.”
Bernanke responded that “the evidence is that all of the things we’ve done have not driven inflation above the price stability level.” In addition, while the monetary base, which includes $1.55 trillion in bank reserves, has “grown tremendously,” the money supply that “most Americans think about” which includes cash and checking accounts, hasn’t expanded “unusually,” he said.
Bernanke said yesterday that the Fed’s remaining tools to boost growth include giving more information about its pledge to keep interest rates low at least through mid-2013, reducing the rate paid on banks’ reserve deposits and buying more securities.
The Fed chief and his colleagues may decide to link a future rise in interest rates more closely to their outlook for inflation and possibly unemployment over the medium term, said Roberto Perli, managing director in charge of policy research at International Strategy and Investment Group in Washington.
The Federal Open Market Committee could say that it will see no need to tighten policy so long as their forecast for inflation for the next two to three years remains below 2 percent. The message would be clearer if the FOMC also specified what unemployment rate would induce them to raise rates, he said.
“This type of policy is probably more powerful in terms of keeping rates where they want them to be than buying a few hundred billion of Treasuries,” said Perli, a former associate director in the Fed’s Division of Monetary Affairs. “Something on this might come out in November, but reaching an agreement will be very challenging given the many different views” of policy makers, he said.
‘Off the Table’
Responding to a question, Bernanke said the central bank has no immediate plans for another round of large-scale asset purchases, known as quantitative easing. At the same time, he said, the Fed doesn’t take “anything off the table.”
The U.S. jobless rate was 9.1 percent in August and has been stuck at 9 percent or higher for five months. Employers added zero jobs to payrolls in August, down from 85,000 in July, according to the Labor Department. Sustained payroll increases of around 150,000 a month are needed to bring unemployment down about half a percentage point over a year, according to Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Bernanke indicated he wouldn’t go too far in the opposite direction of what some Republicans want. He dismissed a suggestion by Vermont Senator Bernard Sanders, an independent and self-described socialist, that if the Fed could lend trillions of dollars to big banks during the crisis, it could also set up a similar large-scale program for small businesses now.
“I don’t think that’s our role and I’m sure we don’t have the authority to do that,” Bernanke told Sanders.
Bernanke is still regarded well personally even by his Republican critics. DeMint began his questioning by thanking the Fed chief for his service during a “very difficult time.” Representative Kevin Brady, a Republican from Texas who’s vice chairman of the Joint Economic Committee, said Bernanke is “serving very well” even as they disagree over the Fed’s monetary stimulus over the past year.
“They’re trying to do way too much, but Chairman Bernanke’s not the problem,” Brady said yesterday in an interview with Bloomberg Television. Instead, he criticized President Barack Obama’s White House for “failed leadership.”