Federal Reserve Chairman Ben S. Bernanke signaled the Fed is prepared to keep buying bonds at its present pace as he dismissed concerns record easing risks sparking inflation or fueling asset price bubbles.
“We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery,” Bernanke said yesterday in testimony to the Senate Banking Committee in Washington. Inflation is “subdued,” and will probably stay at or below the Fed’s 2 percent goal, he said.
Bernanke pushed back against colleagues on the Federal Open Market Committee who favor curtailing the $85 billion in monthly bond-buying amid concern about the growth of the Fed’s record $3.1 trillion balance sheet. Stocks rose on expectations continued stimulus would fuel the expansion and as reports showed gains in home prices and sales.
“I don’t think they are anywhere near saying they have to taper the purchases now,” said Roberto Perli, managing director in charge of policy research at International Strategy & Investment Group in Washington and a former economist at the Fed’s Division of Monetary Affairs.
The Standard & Poor’s 500 Index advanced 0.6 percent to 1,496.94 after tumbling 1.8 percent on Feb. 25. The yield on the 10-year Treasury note rose from a one-month low, increasing two basis points, or 0.02 percentage point, to 1.88 percent.
“Bernanke’s view, and the view of the majority of the committee, is that the Fed is doing the right thing,” said Conrad Dequadros, senior economist at RDQ Economics in New York. “There is no hint here of tapering back on the asset purchases.”
Bernanke, 59, plans to resume his testimony at 10 a.m. today before the House Financial Services Committee, which is led by Representative Jeb Hensarling, a Texas Republican.
Dequadros said Bernanke’s testimony supported his view that the current pace of asset purchases will probably continue “well into the second half of 2013.”
Any pullback in the pace of purchases probably won’t happen until mid-year at the earliest, Perli said.
In exchanges with Republican senators, Bernanke said the Fed wasn’t gambling with inflation or financial stability as it tried to fulfill its congressional mandate to ensure stable prices and promote maximum employment.
Senator Robert Corker, a Tennessee Republican, called Bernanke “the biggest dove since World War II,” suggesting the Fed chairman favored increasing employment over containing inflation.
“I think it’s something you’re rather proud of,” Corker said.
“You called me a dove. Well, maybe in some respects I am,” Bernanke said. “But on the other hand, my inflation record is the best of any Federal Reserve Chairman in the post-war period.”
The Fed’s preferred gauge of inflation, the personal consumption expenditures price index, matched a three-year low of 1.3 percent in December compared with a year earlier.
The inflation index has averaged 2.1 percent since Bernanke took office in January 2006, according to Commerce Department data compiled by Bloomberg. That’s below the 3.8 percent average level from the January 1960 start of monthly data until Bernanke became chairman, the data show.
When pressed by Senator Patrick Toomey, a Pennsylvania Republican, about any risks to financial markets from unwinding the balance sheet, Bernanke said the Fed may never sell the assets.
“We could exit without ever selling by letting it run off,” or holding an asset to maturity, Bernanke said.
Policy makers have publicly debated the risk of financial instability from the bond buying, with Fed Governor Jeremy Stein saying this month that some credit markets, including leveraged loans and junk bonds, show signs of potentially excessive risk-taking. Kansas City Fed President Esther George has warned of risks from farm land prices at “historically high levels.”
Bernanke said “although accommodative monetary policies may increase certain types of risk-taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy.”
The Fed chief also dismissed concerns the central bank’s remittances to the Treasury may decline when interest rates rise. The Fed returned a record $88.9 billion to the Treasury in 2012, yet recent research from the central bank shows the payments to taxpayers could disappear for as long as six years.
“To the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury,” he said.
He also described the job market as being “generally weak.”
Unemployment rose to 7.9 percent in January and will probably remain at the same level this month, according to the median of 14 economist estimates in a Bloomberg survey. The rate has fluctuated between 7.8 percent and 7.9 percent since September. Fed officials estimate that full employment ranges from 5.2 percent to 6 percent.
In reply to Toomey’s questions, Bernanke said the Fed needs to balance the risk of a large portfolio with the costs of doing too little.
“There is no risk-free approach to this situation,” he said. “The risk of not doing anything is severe, as well.”
Economists estimate U.S. growth will slow to 1.8 percent this year from 2.2 percent last year, according to the median of 76 forecasts in a Bloomberg survey.
Automatic federal budget cuts set to begin March 1 will put a “significant” burden on the economy if lawmakers can’t avert the reductions, Bernanke told lawmakers.
Congress agreed to $1.2 trillion in across-the-board spending cuts over nine years as part of a deal to increase the U.S. debt limit. The reductions, to be split almost evenly between defense and non-defense spending, were intended to be so onerous that Congress and the president wouldn’t let them occur.
Bernanke, in an exchange with Senator Tim Johnson, the South Dakota Democrat who leads the banking committee, said the fiscal deadlock is “costly in terms of the ability of the private sector to plan, to take risks, and help grow the economy.”