Bernanke Defends Asset Buying as Benefits Outweigh RisksJeff Kearns and Joshua Zumbrun
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.”
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 in the first day of his semiannual monetary policy report to Congress. He also urged lawmakers to put the budget on a “sustainable long-run path.”
Bernanke and his colleagues on the Federal Open Market Committee are debating whether to curtail $85 billion in monthly bond-buying amid concern the Fed’s record $3.1 trillion balance sheet may encourage excessive risk-taking by investors and complicate the Fed’s exit from easing. Several participants at the Jan. 29-30 meeting said the Fed should be prepared to vary the pace of purchases as the economic outlook changes, according to minutes released last week.
Bernanke, 59, repeated prior Fed statements that the asset purchases will continue unless the labor-market outlook shows “substantial improvement” from current levels. He also described the job market as being “generally weak.”
Most U.S. stocks gained, following the biggest slump since November for benchmark indexes, amid better-than-estimated housing and consumer confidence data. The Standard & Poor’s 500 Index climbed 0.1 percent to 1,489.55 at 12:05 p.m. in New York after rising as much as 0.7 percent. The yield on the 10-year Treasury note fell 1 basis point, or 0.01 percentage point, to 1.85 percent.
In exchanges with senators during a question-and-answer period, Bernanke denied that the Fed is engaging in a “currency war” through its asset purchases and responded to a suggestion that he is a “dove” who favors easy policy.
Fed policies “are increasing demand globally and helping not only our businesses but the businesses in other countries that export to us,” he said. “This is not a beggar-thy-neighbor policy.”
“You called me a dove,” Bernanke said in response to a question from Republican Senator Bob Corker of Tennessee. “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.”
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. Bernanke cited an estimate from the nonpartisan Congressional Budget Office that the spending cuts known as sequestration will cause a 0.6 percentage-point reduction in growth this year.
“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Bernanke said. “Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”
Bernanke defended the Fed’s asset purchases and near-zero target interest rate, saying that “monetary policy is providing important support to the recovery.”
“Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods,” he said.
The Fed chief said 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 farm land prices at “historically high levels.”
Bernanke said that “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 that the central bank’s remittances to the Treasury could decline in the future once interest rates rise. The Fed returned a record $88.9 billion to the Treasury in 2012, yet 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.
“People are coming into the labor force, and even so the unemployment rate isn’t going back up,” said Roberto Perli, a managing director at International Strategy & Investment Group Inc. in Washington and a former economist in the Fed’s Division of Monetary Affairs. “The economy is able to absorb those workers coming back in, and those are encouraging factors.”
The labor force participation rate has risen since September, when the share of working-age people in the labor force fell to a 31-year low of 63.5 percent. The rate held steady at 63.6 percent in January for a third straight month.
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 economy may confront more fiscal contraction if Republicans in Congress and Obama fail to avert automatic budget cuts known as sequestration. Congress agreed to the reductions as part of a deal to increase the U.S. debt limit. The reductions would be split almost evenly between defense and non-defense spending.
The cuts 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.
CBO Director Doug Elmendorf told lawmakers at a hearing earlier this month that his nonpartisan agency estimates reductions would reduce annual gross domestic product by 0.6 percent this year, enough to eliminate 750,000 jobs.
The Fed’s asset purchases are helping to maintain gains in the stock market. The Standard & Poor’s 500 Index rallied 13 percent 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.”
The Fed’s purchases of mortgage securities have also helped push mortgage rates to new lows, spurring a revival in housing. The average fixed rate on a 30-year mortgage was 3.56 percent on Feb. 21 and fell to a record 3.31 percent in November, Freddie Mac data show.
That’s helped housing prices, which began to collapse in 2006, sparking the longest and deepest recession since the Great Depression. The S&P/Case-Shiller index of home prices in 20 cities rose 6.8 percent in December from a year earlier, the biggest advance since July 2006, a report today showed.
A report from the Commerce Department showed purchases of new homes jumped in January to the highest level since July 2008. Sales surged 15.6 percent to a 437,000 annual pace.
Also today, the Conference Board’s index of consumer confidence climbed to 69.6, exceeding all forecasts in a Bloomberg survey of economists, from a revised 58.4 in January. It was the first improvement in four months and the biggest since November 2011.
Robert Toll, chairman and co-founder of Toll Brothers Inc., the largest U.S. luxury-home builder, said on a Feb. 20 conference call that home prices are getting a boost because of Fed policies and the “low inventories” of available housing.
“These factors plus record low interest rates are boosting the housing market’s recovery,” Toll told analysts on the call. “Buyers are reentering the housing market.”
While the Fed’s bond purchases have helped boost remittances to the Treasury, which rose to a record $88.9 billion in 2012, some lawmakers have voiced concern that the Fed’s policies pose too much risk.
The Fed would add $1 trillion to its balance sheet if it continues purchasing securities at the current pace through the end of the year.
Representative Jim Jordan, an Ohio Republican who chairs a subcommittee of the House Committee on Oversight and Government Reform, asked Bernanke in a Feb. 19 letter for more details about the portfolio’s risks.
“Such a large portfolio could cause significant problems when the Federal Reserve begins to unwind,” Jordan wrote.