Bernanke: Fed Won't Let Infl Rise; For Now,Supporting Growth Jul 21
/ 14:22
By Steven K. Beckner
WASHINGTON (MNI) - Federal Reserve Chairman Ben Bernanke Tuesday
continued to provide assurances that the Fed will not permit an
inflation outbreak while also vowing to promote economic recovery in
congressional testimony.
Bernanke, responding to questions from members of the House
Financial Services Committee after presenting the Fed's semi-annual
Monetary Policy Report to Congress, expressed concern about the state of
the commercial real estate market and said the Fed is doing its utmost
to ease credit conditions in that market.
He also expressed concern a number of times about the size of
federal budget deficits and their possible implications for long-term
interest rates. He said it is "premature" to talk about a second fiscal
stimulus package.
And he defended the Fed's independence against proposals to subject
monetary policy to audits by the General Accounting Office.
In his prepared testimony, Bernanke had said the Fed has the tools
-- and, he implied, the will -- to tighten monetary policy in a "smooth
and timely way" when needed to avoid a future rise in inflation. But he
made clear the Fed will not be tightening in the foreseeable future.
He said inflation is "subdued" and apt to remain so for two years.
And while citing signs of improvement in economic and financial
conditions, he warned the apparent stabilization of consumer spending
could prove "transient." So he said "monetary policy remains focused on
fostering economic recovery."
Bernanke continued in that vein as a number of members questioned
him about inflation risks growing out of the Fed's dramatic expansion of
its balance sheet and the supply of bank reserves.
Despite this expansion, he said, "the Fed is not putting money out
into the economy." He said the Fed has been creating bank reserves, but
said they are "just sitting idly, they are not chasing goods." And he
said "we have ways of sucking it back in" if necessary.
Bernanke said he and the Federal Open Market Committee are "quite
aware of this issue" and declared, "We will not allow broad measures of
money to increase rapidly enough to cause inflation."
Earlier, Bernanke defined inflation as "a change in the consumer
price level," and he said that "is very stable." He said monetary
aggregates like M2 are "not growing rapidly."
Bernanke called inflation fears "misguided" in the sense that the
Fed can withdraw monetary stimulus in time to avoid inflation. And he
went on to say that he does "not think financial markets are showing a
great deal of concern about inflation."
Given "subdued" inflation and the weakening of the labor market,
Bernanke said "the Fed is being very aggressive" in "trying to support
the economy." And he implied that this stance will continue for the
foreseeable future.
He said "the outlook has certainly improved since March," but made
clear he still sees downside risks to growth and only a modest recovery
that will keep unemployment abnormally high.
"We have a very long haul," he said, adding that unemploymnent is
apt to stay high "for quite awhile."
Asked about when the Fed might begin to tighten credit, Bernanke
said it is "a very difficult problem" to try to "pick the right time to
tighten ... .It's an uncertain business ... to try to judge the right
time."
In making that judgment, he said the FOMC will "look for more
evidence of sustained recovery" and increased utilization of labor and
other resources, as well as wage-price pressures.
Bernanke conceded that if inflation expectations were to rise while
the economy remained weak and unemployment high, that would "pose a
serious problem for the Fed." Were the Fed to "lose credibility" as
reflected in increased inflation expectations, he suggested the Fed
would have little choice but to respond even if the economy had not
fully recovered.
But that is not a scenario the Fed considers likely.
Echoing earlier prepared testimony, Bernanke said the Fed's ability
to pay interest on reserves is "a very powerful tool" that "will help us
control the federal funds rate" when it comes time to unwind the Fed's
"highly accommodative" monetary policy.
Bernanke denied that the Fed is or has any intention of "monetizing
the debt" which the U.S. Treasury is issuing in record amounts to fund
mounting federal budget deficits. He said the purpose of the Fed's
various credit programs has been "to address private credit markets" and
said that "when we complete the $300 billion (in planned purchases of
longer term Treasury securities) we will have less Treasuries" than it
had before the program began because it has reduced other Treasury
holdings.
"We are not taking a significant portion of Treasuries," he added.
Asked whether the Fed will buy more Treasuries after it has bought
the $300 billion authorized, Bernanke said "that's a decision the FOMC
needs to make because it has implications for monetary policy."
"We don't have any near-term plans to divest ourselves" of Treasury
securities," he said in response to a question.
In one of his numerous responses to questions about problems in
commercial real estate, Bernanke said "We're paying a lot of attention"
to that sector and "watching that situation very carefully." He said the
sector is "weakening" and cited rising vacancy rates and falling rents
and property values.
He noted that the Fed has expanded its Term Asset-Backed Securities
Loan Facility (TALF) to finance purchases of both new and "legacy"
commercial mortgage-backed securities (CMBS). He expressed hope that
this will help increase credit flows in that market, but he said it is
"too early" to judge its success.
Bernanke also said the Fed is considering whether to add other
"complex" assets to the TALF program. And he vowed to give the financial
markets plenty of notice before that and other programs are phased out.
"We will extend (TALF) if conditions warrant," he said, but "we're
not necessarily going to try to hit any particular number" of lending.
As he had in prepared testimony, Bernanke stressed the need for
"fiscal sustainability." If financial markets do not perceive that there
is a plan to return to lower deficits, he said long-term interest rates
could rise. He expressed concern that the U.S. debt to GDP ratio is on
track to rise from 40% to 60% next year and possibly go higher than
that.
There needs to be "a plan for getting back to a more sustainable
level," he said.
Bernanke said the Treasury's "ability to float large amounts ( of
debt) in the short and medium term depends on the credibility of debt
reduction." If markets do not think there is a credible plan, he said
out-year deficits will be "brought forward" and affect yields.
If fiscal policy stays on an unsustainable path, he said he agreed
with Congressional Budget Office director Douglas Elmendorf's warning of
"substantial harm" to the economy.
Bernanke said the Obama's January forecast of the impact of its
stimulus program was "clearly ... too optimistic." But he said it is
"very early" to talk about another fiscal stimulus package, noting that
"less than a quarter" of the Obama administration's first $787 billion
stimulus package has been implemented.
Twice, Committee Chairman Rep. Barney Frank, D-Mass., warned
Bernanke against "premature" tightening. Meanwhile, Rep. Ron Paul,
R-Tex., has spearheaded an effort to force the Fed to be more
"transparent" about monetary policy.
Bernanke inveighed against "political interference" which he said
could frighten financial markets into expecting more inflation, which he
said could lead to higher long-term interest rates that would hurt
economic growth. Forcing the FOMC to release transcripts of its meetings
earlier than the current five years would be perceived as political
interference and an undermining of the Fed's independence, he warned.
** Market News International Washington Bureau: 202-371-2121 **
