June 24, 2024

Bernanke Defends Fed’s Role in Running Economy

Mr. Bernanke said he remained convinced that recent increases in oil prices would subside, and he saw little evidence of broader price increases in the foreseeable future.

“While it is very, very important to help the economy create jobs and help to support the recovery, I  think every central banker understands that keeping inflation low is absolutely essential to a successful economy and we will do what we can to make sure that happens,” he said.

Mr. Bernanke spoke after the Fed lowered its projections for domestic economic growth in 2011, predicting expansion of 3.1 percent to 3.3 percent. In January, the Fed had predicted growth of 3.4 percent to 3.9 percent, but Mr. Bernanke said that exports, construction spending and military spending have all been lower than expected.

The Fed’s policy-making committee voted unanimously Wednesday to maintain several policies intended to stimulate growth, including holding short-term interest rates near zero and maintaining the Fed’s investment portfolio at its current level, about $2 trillion. The Fed will complete a plan to purchase $600 billion in Treasury securities by the end of June.

Mr. Bernanke said that the recovery had become self-sustaining, meaning that growth would continue even without extraordinary government support, although he added that he still wanted to see a faster pace of growth and more job creation.

But Mr. Bernanke cautioned that if the economy did falter, it could prove difficult for the Fed to take additional stimulative steps because of growing inflationary pressures.

“The trade-offs are getting harder at this point,” Mr. Bernanke said. “Inflation is getting higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risks and in my view we can’t achieve a sustainable recovery without keeping inflation under control.”

Mr. Bernanke spoke at an unprecedented news conference, answering questions from reporters in a break with the Fed’s long tradition of providing nothing more than its statement to describe the decisions made by the Federal Open Markets Committee.

He is seeking to build public understanding and support for the central bank’s controversial programs. His remarks may also create a reference point for investors confused by the cacophony of contradictory speeches given by other members of the policy-making committee in the wake of each meeting.

The decisions by the Fed’s policy-making board, announced Wednesday at the conclusion of a two-day meeting, reflected the central bank’s judgment that the economy still needed help and that providing assistance was unlikely to ignite inflation.

“Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the committee met in March,” the committee said in a statement. “Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.” 

The Fed’s statements after recent meetings have suggested a gradual increase in its confidence in the health of the economy. The most recent statement, issued Wednesday described the recovery as “proceeding at a moderate pace.”

“Household spending and business investment in equipment and software continue to expand,” the statement said.  “However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.”

It also said that the labor market conditions “are improving gradually.” After its March meeting, the committee said conditions “appear to be improving gradually.”

The government’s official unemployment rate — the share of the labor force actively seeking jobs — remains at very high levels, although it fell to 8.8 percent in March  from a peak of 10.1 percent in late 2009. Moreover, the unemployment rate would be more than twice as high if the government chose to include the large numbers of Americans who have stopped looking for work or accepted part-time jobs.

The Fed said Wednesday that it would maintain short-term rates near zero “for an extended period.”

Moreover, while the Fed will conclude its program of asset purchases in June, the central bank said that it would continue to maintain its investment portfolio at its current size, well over $2 trillion, by reinvesting any principal payments.

“Increases in the prices of energy and other commodities have pushed up inflation in recent months.  The committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations,” the statement said.

Critics of the Fed’s position on inflation argue that higher commodity prices will push up the price of other goods and services. But Mr. Bernanke and his allies consider it more likely that the higher prices will force Americans to reduce consumption, because wages are not rising and therefore Americans do not have more money to spend. As demand drops, they say, the price of food, oil and other commodities will also fall.

Fed officials emphasize that they are concerned about the price of food and oil. But they say that best way to keep those prices stable over the long term is to ignore short-term fluctuations, just as drivers are taught to steer straight by looking down the road.

The Fed finds evidence for its position in measures of “core inflation,” which track the movement of goods that change prices more slowly. Those measures generally show moderate price increases, which the Fed regards as healthy.

The decision was once again unanimous, despite public speeches by some members expressing misgivings that the Fed is underestimating the risks of inflation. So far, however, the most vocal critics — Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard W. Fisher, president of the Federal Reserve Bank of Dallas — have not registered their concerns in the form of dissenting votes.

The committee next meets June 21-22.

Article source: http://www.nytimes.com/2011/04/28/business/economy/28fed.html?partner=rss&emc=rss