Bernanke Defends Asset Buying as Benefits Outweigh Risks
Federal Reserve Chairman Ben S. Bernanke defended the central bank’s unprecedented asset purchases, saying they are supporting the expansion with little risk of inflation or 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 today in testimony to the Senate Banking Committee in Washington. “Inflation is currently subdued, and inflation expectations appear well anchored.”
Bernanke used his testimony to push 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. He also differed with senators who said the central bank was engaged in a “currency war” and said he continues to work on ensuring that even the largest financial institutions don’t get special status as being too big to fail.
“He pretty much had a checklist of all the new arguments about the efficacy of low rates and risks of QE,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “And he checked them all off: these are not the concerns that you think they are.”
Most U.S. stocks gained, following yesterday’s slump that was the biggest since November for benchmark indexes, amid housing and consumer confidence data that was better than economists had forecast. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,492.14 at 1:28 p.m. in New York after rising as much as 0.7 percent. The yield on the 10-year Treasury note was little changed at 1.86 percent.
Bernanke faced bipartisan questioning on the central bank’s efforts to remove the impression that some banks are too big to fail. Senators Elizabeth Warren, a Massachusetts Democrat, and David Vitter, a Republican from Louisiana, pressed him to do more.
Warren asked Bernanke: “We’ve now understood this problem for nearly five years, so when are we going to get rid of too big to fail?”
Bernanke said that the Fed is putting “a lot of effort into this” and that “as somebody who has spent a lot of late nights trying to deal with these problems during the crisis, I would very much like to have the confidence that we could close down a large institution without causing damage to the rest of the economy.”
Bernanke also denied that the Fed was engaging in a currency war, a term used to refer to competitive devaluations, through its asset purchase programs. That was in response to Senator Bob Corker, a Tennessee Republican, who opened his questions by asking “when the Fed decided it was going to stimulate a global currency war as it did, did you -- did you embark on that thinking, well you know, our country’s in trouble and let’s -- sort of the heck with everybody else?”
Corker also said that “I don’t think there’s any question that you would be the biggest dove, if you will, since World War II,” Corker said, using the term for Fed officials who favor easy policy.
Bernanke responded “well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period -- at least one of the best, about 2 percent average inflation.”
The 59-year-old Fed chairman also used his appearance before Congress to caution lawmakers that automatic federal budget cuts set to begin March 1 will put a “significant” burden on the economy if lawmakers can’t avert the reductions. He also urged them to put the budget on a “sustainable long-run path.”
A year after first using the term “fiscal cliff” to warn of the cost of immediate spending cuts, Bernanke returned to Congress with three days remaining to avert $1.2 trillion of across-the-board cuts over nine years that take effect unless lawmakers and President Barack Obama agree on an alternative.
CBO Director Doug Elmendorf told lawmakers at a hearing earlier this month that his nonpartisan agency estimates the cuts would reduce annual gross domestic product growth by 0.6 percentage point this year, enough to eliminate 750,000 jobs.
Citing that estimate, Bernanke said, “given the still- moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”
Congress agreed to the reductions as part of a deal to increase the U.S. debt limit. The spending cuts would be split almost evenly between defense and non-defense.
The reductions would cost the U.S. hundreds of thousands of jobs and hamper military readiness, Obama said at a Feb. 19 press conference in which he urged lawmakers to at least approve a temporary package that buys more time for negotiation.
The Fed chief said in his testimony that the FOMC was evaluating the benefit of its policy in creating jobs against potential risks such as complicating their efforts to eventually return their policy to normal, causing financial instability by spurring asset bubbles, and increasing the risk that the Fed loses money on its operations.
Bernanke said that a “potential cost” of Fed policies that central bankers take “very seriously” is the “possibility that very low interest rates, if maintained for a considerable time, could impair financial stability.”
Policy makers have publicly debated the risk of financial instability, with Fed Governor Jeremy Stein saying earlier 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 farmland prices at “historically high levels.”
Bernanke said that while the Fed’s policy “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 that the central bank’s remittances to the Treasury could decline in the future once interest rates rise. After the Fed returned a record $88.9 billion to the Treasury in 2012, recent research from the central bank has shown that those 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.
Bernanke has held interest rates close to zero since December 2008 and pledged to continue buying bonds until the labor market improves “substantially.”
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.
Economists expect 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. The world’s largest economy unexpectedly shrank 0.1 percent in the fourth quarter for the worst performance since the second quarter of 2009, partly because of a 22.2 percent slump in defense spending. The expansion will accelerate next year to 2.7 percent, according to the projections.
“The pause in real GDP growth last quarter does not appear to reflect a stalling-out of the recovery,” Bernanke said today. “Available information suggests that economic growth has picked up again this year.”
The Fed’s asset purchases are helping to maintain gains in the stock market. The Standard & Poor’s 500 Index rallied 13 percent (SPX) last year and has climbed another 4.3 percent this year through yesterday, with nine of 10 industry groups gaining. The yield on the 10-year Treasury note climbed to 1.86 percent yesterday from a record low of 1.39 percent on July 24.
Bernanke said U.S. stock prices don’t appear to be overvalued.
“The so-called equity premium associated with stock prices is quite wide,” Bernanke said in response to a question. So, by that measure stocks “don’t appear overvalued given earnings and interest rates.”
-- With assistance from Aki Ito in San Francisco and Craig Torres in Washington. Editors: Mark Rohner, Kevin Costelloe
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