Bernanke Says He Won’t Trade Inflation Goal for More Job Growth

Ben Bernanke
Ben S. Bernanke, chairman of the U.S. Federal Reserve, at the House Budget Committee hearing in Washington on Feb. 2, 2012. Photographer: Andrew Harrer/Bloomberg

Federal Reserve Chairman Ben S. Bernanke said the central bank will seek to keep prices rising at a 2 percent rate and rejected suggestions that it would sacrifice its inflation goal to boost employment.

“Over a period of time we want to move inflation always back toward 2 percent,” Bernanke said today in Washington in response to a question from Republican Representative Paul Ryan of Wisconsin, chairman of the House Budget Committee. “We’re always trying to bring inflation back to the target.”

Bernanke defended the central bank’s newly established inflation goal after Ryan suggested it might be willing to tolerate higher inflation to fulfill the second part of its mandate from Congress, which is to seek maximum employment.

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

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.”

Bernanke, 58, also came under fire from Scott Garrett, a New Jersey Republican, who said the Fed chairman overstepped his authority when he submitted a paper to Congress last month that discussed whether mortgage companies Fannie Mae and Freddie Mac should take more losses to support housing markets.

‘Issuing Resolutions’

“Is this an invitation now to Congress that we should be issuing resolutions to what monetary policy the Fed should be doing?” Garrett asked.

“We’ve gotten a lot of requests from individual congressmen for our views and for our analysis,” Bernanke said. “I am sorry if you think we went too far.’

In his prepared remarks, Bernanke acknowledged recent improvement in some economic data while cautioning that the economy still faces risks, including fiscal deficits that in the long-run must be reduced.

“Fortunately, over the past few months, indicators of spending, production, and job-market activity have shown some signs of improvement,” Bernanke said. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.” He also said the Fed expects inflation to “remain subdued.”

Stocks, Treasuries

Stocks rose after Bernanke’s comments before falling back. The Standard & Poor’s 500 Index was up 0.1 percent to 1,324.78 at 1:20 p.m. in New York after climbing as much as 0.4 percent. The yield on the 10-year Treasury note was little changed at 1.82 percent.

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 his Jan. 25 press conference, after the Federal Open Market Committee said it would keep its key interest rate near zero until at least late 2014.

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.

Economic Reports

Reports indicating strength in the labor market, manufacturing and construction spending helped drive 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 for unemployment insurance payments dropped by 12,000 to 367,000 in the week ended Jan. 28, Labor Department figures showed today. Manufacturing in the U.S. grew in January at the fastest pace in seven months, according to a report yesterday 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.”

Budget Deficit

Bernanke devoted half of his prepared speech to a discussion of the 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. “Achieving this goal should be a top priority.”

At the same time, Congress should “take care not to unnecessarily impede the current economic recovery,” Bernanke said. Under questioning by lawmakers, he declined to be drawn into specific policy prescriptions, such as proposals to extend the payroll tax cut and unemployment benefits.

The nonpartisan Congressional Budget Office said this week it expects the budget deficit to narrow to $1.1 trillion this fiscal year from $1.3 trillion last year. The deficit would reach $1.5 trillion by 2022, CBO estimated, and the debt would rise to levels unseen since the government was paying off its World War II expenses.

Household Spending

The Fed chairman said progress in payroll growth will be an important determinant to household spending in coming quarters, which in turn will influence the pace of the expansion.

Bernanke noted that the labor market “improved modestly” over the past year. Total non-farm payrolls are forecast to rise by 145,000 jobs tomorrow, when the Labor Department releases its January report. The unemployment rate is likely to remain at 8.5 percent, economists predict, where it was in December, down from 8.7 percent the previous month.

“We still have a long way to go before the labor market can be said to be operating normally,” Bernanke told the committee. “Particularly troubling is the unusually high level of long-term unemployment.”

United Parcel Service Inc., the world’s largest package-delivery company, forecast a 2012 profit that exceeded analysts’ estimates as shipping demand increases.

“We certainly are seeing a better U.S. economy than we would have thought back in probably August, September,” said UPS Chief Executive Officer Scott Davis in a Jan. 31 call with investors and analysts. “Back in that timeframe, people were talking about a chance for a second recession. You don’t hear that anymore.”

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