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Bernanke defends Fed policies against GOP critics
Question of the Day
WASHINGTON — Chairman Ben S. Bernanke defended the Federal Reserve’s decision to hold interest rates at record-low levels for the next three years, during a contentious hearing before federal lawmakers.
“I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar,” Ryan told Bernanke. “The prospect of all three is adding to uncertainty and holding our economy back.”
Bernanke disagreed. He said prices have stabilized since spiking in early 2011 and the dollar has shown no signs of weakening.
Bernanke testified one week after the Fed signaled that a full recovery could take at least three more years. As a result, the Fed said it doesn’t plan to raise its benchmark interest rate from a record low before late 2014 at the earliest.
The questions from lawmakers covered a range of topics, from Europe’s debt crisis to the surging federal deficit.
Bernanke didn’t stray far from remarks he made last week after the Fed’s policy meeting. He said the economy has shown improvement, but that the pace has been frustratingly slow. He noted that many threats remain, including Europe’s debt crisis and the nation’s rising debt.
Bernanke generally received praise from Democrats, while Republicans were more critical.
Rep. Scott Garrett, New Jersey Republican, said the Fed ventured into Congress’s territory when it issued a white paper last month exploring proposals to rescue the troubled housing market. He compared the action to lawmakers approving a resolution instructing the Fed on monetary policy — the Fed’s use of interest rates to try to boost or slow the economy.
Bernanke apologized if Garrett felt the Fed went too far. He said that the weak housing sector was holding back overall growth and that this was of great concern for the Fed. He said the central bank did not endorse any actions but instead just explored various policy options.
“We were trying to provide pros and cons,” Bernanke said.
Still, much of the morning was spent debating the Fed’s policies.
Rep. Diane Black, Tennessee Republican, said the Fed wasn’t showing enough concern about the impact low interest rates were having on people who keep their money in conservative investments, such as savings accounts and CDs.
The interest on those investments hasn’t kept pace with inflation.
A few questions touched on transcripts released last month that showed the Fed was slow to recognize the severity of the housing crisis in 2006. Bernanke said the Fed had learned a lot of lessons since then.
“While I can never promise that we will not have another financial crisis, I think we have made a lot of progress in how we monitor financial situations,” he told the lawmakers.
Bernanke urged lawmakers to balance their desire to cut deficits with policies that could help boost the weak U.S. economy in the short run.
Earlier this week, the Congressional Budget Office estimated that the deficit will top $1 trillion for a fourth straight year and could stay around that level for years.
A key reason the deficit has surged in the past four years is that the government collected less tax revenue. In part, that’s because the economy has yet to regain the millions of jobs lost during the Great Recession.
And the government has had to spend more on emergency unemployment benefits and efforts to boost growth, such as the Social Security tax cut that will expire in February unless Congress extends it.
By Tom Harris and Madhav Khandekar
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