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| Fed Chairman Defends Stimulus Efforts | Fed Chairman Defends Stimulus Efforts |
| (35 minutes later) | |
| WASHINGTON – The Federal Reserve chairman, Ben S. Bernanke, played down concerns Tuesday about the Fed’s economic stimulus campaign, describing it as necessary and effective and making clear it is likely to continue for some time. | WASHINGTON – The Federal Reserve chairman, Ben S. Bernanke, played down concerns Tuesday about the Fed’s economic stimulus campaign, describing it as necessary and effective and making clear it is likely to continue for some time. |
| In testimony before the Senate Banking Committee, Mr. Bernanke also urged Congress and the Obama administration to replace the budget cuts scheduled to begin Friday with a plan to reduce federal deficits more gradually. | In testimony before the Senate Banking Committee, Mr. Bernanke also urged Congress and the Obama administration to replace the budget cuts scheduled to begin Friday with a plan to reduce federal deficits more gradually. |
| “Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health,” Mr. Bernanke said. He warned that the combination of previous spending cuts and the looming mandatory reductions, known as sequestration, “could create a significant headwind for the economic recovery.” | “Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health,” Mr. Bernanke said. He warned that the combination of previous spending cuts and the looming mandatory reductions, known as sequestration, “could create a significant headwind for the economic recovery.” |
| Still, Mr. Bernanke was relatively upbeat about the health of the broader economy, which he described as growing at a “moderate if somewhat uneven pace.” | Still, Mr. Bernanke was relatively upbeat about the health of the broader economy, which he described as growing at a “moderate if somewhat uneven pace.” |
| He said disappointing growth in the fourth quarter “does not appear to reflect a stalling-out of the recovery.” Consumer demand kept rising, and “available information suggests that economic growth has picked up again this year,” he said. | He said disappointing growth in the fourth quarter “does not appear to reflect a stalling-out of the recovery.” Consumer demand kept rising, and “available information suggests that economic growth has picked up again this year,” he said. |
| Mr. Bernanke, who reports to Congress on monetary policy twice each year, used his written testimony to defend the Fed’s expansion of its economic stimulus campaign in September and December to reduce unemployment more quickly. He will testify before the House Financial Services Committee on Wednesday. | Mr. Bernanke, who reports to Congress on monetary policy twice each year, used his written testimony to defend the Fed’s expansion of its economic stimulus campaign in September and December to reduce unemployment more quickly. He will testify before the House Financial Services Committee on Wednesday. |
| The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent. | The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent. |
| “In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear,” Mr. Bernanke said. “Monetary policy is providing important support to the recovery” while keeping inflation in check. | “In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear,” Mr. Bernanke said. “Monetary policy is providing important support to the recovery” while keeping inflation in check. |
| Both the asset purchases and the interest-rate policy are aimed at reducing borrowing costs for businesses and consumers. Mr. Bernanke said the recovery of the housing market and higher sales of cars, among other durable goods, showed the benefit of the Fed’s campaign. | |
| Mr. Bernanke was unusually forceful in his defense of Fed policies, particularly during an exchange with Senator Bob Corker, a Tennessee Republican. | Mr. Bernanke was unusually forceful in his defense of Fed policies, particularly during an exchange with Senator Bob Corker, a Tennessee Republican. |
| Mr. Corker, asserting that low interest rates were “throwing seniors under the bus” by reducing returns on some kinds of investments, asked Mr. Bernanke, “Do you all ever talk about the longer-term degrading effect of these policies?” | Mr. Corker, asserting that low interest rates were “throwing seniors under the bus” by reducing returns on some kinds of investments, asked Mr. Bernanke, “Do you all ever talk about the longer-term degrading effect of these policies?” |
| “One thing we talk about is unemployment,” Mr. Bernanke responded. He added that the best way to increase interest rates was to increase growth. | “One thing we talk about is unemployment,” Mr. Bernanke responded. He added that the best way to increase interest rates was to increase growth. |
| Mr. Corker then accused Mr. Bernanke of insufficient concern about potential inflation, saying, “I don’t think there’s any question that you would be the biggest dove since World War II,” using the term dove to denote a Fed official who is more concerned about unemployment than inflation. | Mr. Corker then accused Mr. Bernanke of insufficient concern about potential inflation, saying, “I don’t think there’s any question that you would be the biggest dove since World War II,” using the term dove to denote a Fed official who is more concerned about unemployment than inflation. |
| Mr. Bernanke, clearly piqued, responded, “You call me a dove, but my inflation record is the best of any chairman in the postwar period.” | Mr. Bernanke, clearly piqued, responded, “You call me a dove, but my inflation record is the best of any chairman in the postwar period.” |
| The Fed chairman was more measured on the subject of asset bubbles. | The Fed chairman was more measured on the subject of asset bubbles. |
| Jeremy Stein, a Fed governor, and some other Fed officials have expressed concern in recent months that low interest rates are encouraging excessive risk-taking by investors pursuing higher returns. In a recent speech, Mr. Stein highlighted rising demand for junk bonds and certain kinds of real estate investments, and shifts in bank balance sheets, as areas of potential concern. | Jeremy Stein, a Fed governor, and some other Fed officials have expressed concern in recent months that low interest rates are encouraging excessive risk-taking by investors pursuing higher returns. In a recent speech, Mr. Stein highlighted rising demand for junk bonds and certain kinds of real estate investments, and shifts in bank balance sheets, as areas of potential concern. |
| Mr. Bernanke said the Fed took these concerns “very seriously,” noting that the central bank had significantly expanded its efforts to monitor financial markets and was giving greater priority to financial regulation. | |
| But he noted that low interest rates were also helping to strengthen the financial system, by encouraging companies to increase reliance on long-term funding, allowing debt levels to decline and strengthening growth. | But he noted that low interest rates were also helping to strengthen the financial system, by encouraging companies to increase reliance on long-term funding, allowing debt levels to decline and strengthening growth. |
| He added that he saw no reason to consider a change in course. | He added that he saw no reason to consider a change in course. |
| “To this point 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 and more rapid job creation,” Mr. Bernanke said. | “To this point 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 and more rapid job creation,” Mr. Bernanke said. |
| He also played down a concern expressed by some Fed officials and analysts: that the central bank’s plans to control inflation as the economy recovers may face political complications because it may lose money as it sells off some of its vast holdings of Treasuries and mortgage bonds. | |
| Such losses could be large enough to prevent the Fed from transferring profits to the Treasury Department for the first time since 1934, according to a Fed analysis. | Such losses could be large enough to prevent the Fed from transferring profits to the Treasury Department for the first time since 1934, according to a Fed analysis. |
| Mr. Bernanke, noting that the Fed has transferred $290 billion to Treasury since 2009, said it was “highly likely” that the Treasury would still see a net benefit from the purchases because any losses would not exceed those profits. | Mr. Bernanke, noting that the Fed has transferred $290 billion to Treasury since 2009, said it was “highly likely” that the Treasury would still see a net benefit from the purchases because any losses would not exceed those profits. |
| “Moreover, 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. | “Moreover, 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. |
| When Mr. Bernanke last appeared before Congress in July, he identified three major obstacles to faster growth: the depressed housing market, the financial crisis in Europe and American fiscal policy. In his prepared testimony Tuesday he did not mention Europe and barely touched on housing. But he warned that government policy was continuing to slow the pace of economic growth. | |
| The recent agreements to reduce deficits, Mr. Bernanke said, focused on short-term spending cuts while doing little to address longer-term imbalances. | The recent agreements to reduce deficits, Mr. Bernanke said, focused on short-term spending cuts while doing little to address longer-term imbalances. |
| Instead, he said Congress should “introduce these cuts more gradually and compensate with larger and more sustained cuts in the future.” | Instead, he said Congress should “introduce these cuts more gradually and compensate with larger and more sustained cuts in the future.” |
| Several senators pressed Mr. Bernanke to agree that the economic impact could be reduced by focusing the cuts but not reducing the total amount, but he refused to give much comfort to the proposal. | |
| “The near-term effect on growth would not be substantially different,” he said, although he eventually agreed that there might be modest benefits. | “The near-term effect on growth would not be substantially different,” he said, although he eventually agreed that there might be modest benefits. |
| He even offered senators a little pep talk, telling them that he knew their job was not easy. “I know that you’re trying,” he said, “and I hope you can find the agreement to achieve these important objectives.” |