By Steven K. Beckner
(MNI) – Federal Reserve Chairman Ben Bernanke mounted a vigorous
defense of the Fed’s easy money policies Monday and vowed again that the
Fed will maintain a “highly accommodative” stance until the labor market
shows “substantial” improvement, assuming that inflation remains under
control.
So long as “price stability” is maintained, the Fed will not raise
the federal funds rate from near zero or otherwise tighten monetary
policy “prematurely,” he said, adding that this commitment should boost
consumer and business “confidence.”
Bernanke conceded that the central bank’s unconventional easing
measures are “no panacea” and said fiscal and other steps are needed to
strengthen the recovery, but said they “can provide meaningful help” —
both by reducing mortgage and other market interest rates and by
boosting stock and other asset prices.
The Fed chief’s comments come just over two weeks after the Fed’s
policymaking Federal Open Market Committee unleashed a pair of fresh
monetary stimulus programs — $40 billion per month of mortgage backed
security purchases and a further delay in the anticipated date of hikes
in the funds rate to at least “mid-2015.”
In announcing those actions, the Fed said it expected to continue
buying assets or even increase its purchases “if the outlook for the
labor market does not improve substantially.” What’s more, it said it
“expects that a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the economic recovery
strengthens.”
Bernanke denied that the Fed is courting inflation or “enabling”
reckless fiscal policies in his prepared remarks to the Economic Club of
Indiana.
Reprising many of the themes he explored in his post-FOMC news
conference on a Sept. 13, Bernanke explained the FOMC’s aggressive
actions by saying the economy had “not been growing fast enough recently
to make significant progress in bringing down unemployment … . So the
case seemed clear to most of my colleagues that we could do more to
assist economic growth and the job market without compromising our goal
of price stability.”
He reiterated the Fed will “continue securities purchases and
employ other policy tools until the outlook for the job market improves
substantially in a context of price stability.”
By extending its “forward guidance” on the funds rate to at least
mid-2015, the FOMC was not saying it expects the economy to be “weak
through 2015,” he emphasized.
Rather, Bernanke said, the FOMC’s intent was to convey that “so
long as price stability is preserved, we will take care not to raise
rates prematurely.”
“We hope that, by clarifying our expectations about future policy,
we can provide individuals, families, businesses, and financial markets
greater confidence about the Federal Reserve’s commitment to promoting a
sustainable recovery and that, as a result, they will become more
willing to invest, hire and spend,” he said.
Bernanke said “many other steps could be taken to strengthen our
economy over time, such as putting the federal budget on a sustainable
path, reforming the tax code, improving our educational system,
supporting technological innovation, and expanding international trade.”
But he said the Fed must do its best to fulfill its “dual mandate”
to deliver maximum employment in a context of price stability.
“Although monetary policy cannot cure the economy’s ills,
particularly in today’s challenging circumstances, we do think it can
provide meaningful help,” he said. “So we at the Federal Reserve are
going to do what we can do.”
Although some of his own colleagues have challenged the efficacy of
“quantitative easing,” Bernanke credited past MBS purchases for slashing
mortgage rates and said that is “one reason for the improvement we have
been seeing in the housing market, which in turn is benefiting the
economy more broadly.”
“Other important interest rates, such as corporate bond rates and
rates on auto loans, have also come down,” he said.
What’s more, “lower interest rates also put upward pressure on the
prices of assets, such as stocks and homes, providing further impetus to
household and business spending,” he added.
Bernanke insisted the FOMC is not running undue inflation risks
with its policies. Noting that inflation has averaged “close to 2% per
year for several decades,” he said “the low interest rate policies the
Fed has been following for about five years now have not led to
increased inflation.”
“Moreover, according to a variety of measures, the public’s
expectations of inflation over the long run remain quite stable within
the range that they have been for many years,” he said.
Nor is the Fed “monetizing the debt,” paving the way for future
inflation, he said.
“No, that’s not what is happening, and that will not happen,”
Bernanke asserted. “Monetizing the debt means using money creation as a
permanent source of financing for government spending. In contrast, we
are acquiring Treasury securities on the open market and only on a
temporary basis, with the goal of supporting the economic recovery
through lower interest rates.”
“At the appropriate time, the Federal Reserve will gradually sell
these securities or let them mature, as needed, to return its balance
sheet to a more normal size,” he said.
Although Fed straight asset purchases create bank reserves,
reserves increases “don’t necessarily translate into more money or cash
in circulation, and, indeed, broad measures of the supply of money have
not grown especially quickly, on balance, over the past few years,” he
said.
Once again, Bernanke said the Fed can shrink its balance sheet and
prevent reserves from flowing out into the economy when the time comes
by raising the rate of interest it pays on reserves.
Raising the IOER “allows us to shrink our balance sheet in a
deliberate and orderly way,” he said.
Bernanke said such exit tools must be used “in a timely way,
neither too early nor too late.”
Rebutting another common criticism — one leveled by Dallas Fed
President Richard Fisher in an August interview with MNI, for example —
Bernanke denied the Fed is “enabling bad fiscal policy by keeping
interest rates very low and thereby making it cheaper for the federal
government to borrow.”
“I find this argument unpersuasive,” he said. “The responsibility
for fiscal policy lies squarely with the administration and the
Congress … . Using monetary policy to try to influence the political
debate on the budget would be highly inappropriate.”
Raising rates to try to spur budget cutting on Capitol Hill would
backfire, he suggested. “Such an action would substantially increase the
deficit, not only because of higher interest rates, but also because the
weaker recovery that would result from premature monetary tightening
would further widen the gap between spending and revenues.”
“It seems likely that a significant widening of the deficit —
which would make the needed fiscal actions even more difficult and
painful — would worsen rather than improve the prospects for a
comprehensive fiscal solution,” he added.
As for the oft-heard concern that low rates are hurting savers,
Bernanke noted that “savers often wear many economic hats.” The same low
rates also enhance the values of their homes and pensions, while
boosting the economy, he contended.
** MNI **
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