Bernanke Hardly Dovish Before Senate, Sees Sequester as Risk to Economy
Federal Reserve Chairman Ben S. Bernanke strongly defended the Fed’s monetary stimulus before a Senate panel on Tuesday, saying Congress itself is placing a “significant” burden on the economy with the sequester and urging lawmakers to replace the deep budget cuts set to take effect Friday with more measured, long-term deficit reduction.
Appearing before the Senate Banking Committee, Bernanke gave his most explicit condemnation to date about the sequester’s $85 billion in across-the-board cuts and encouraged lawmakers to craft a more thoughtful plan that would not undermine the economy.
Bernanke cited a Congressional Budget Office estimate that the sequester would reduce economic growth by 0.6 percent this year.
“To address both the near- and longer-term issues, the Congress and the administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said. “Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”
Bernanke waded carefully into the partisan politics surrounding the sequester, which takes effect Friday. He said providing flexibility for administering the cuts, as Republicans propose, might improve the policy ramifications but that the economy would still suffer.
“In terms of whether or not rearranging the cuts would be beneficial, it could be beneficial from the point of view of more efficient allocation of the cuts or cuts that are more consistent with the preferences of Congress,” he said. “I think the near-term effect on growth would probably not be substantially different if you did it that way.”
The fiscal contraction pursued by Congress comes as Bernanke has deployed a series of unorthodox monetary initiatives to boost the economy. Indeed, he noted, “In terms of the near-term recovery, I think there is a sense in which monetary and fiscal policy are working at cross-purposes.”
Bernanke’s appearance comes after signals that some Fed governors are growing uneasy about continuing the Fed’s extraordinary stimulus. The central bank is currently purchasing $85 billion in securities per month, with no announced end date. The Fed has also pledged to keep short-term interest rates remarkably low until the labor market is notably improved.
In his testimony and in response to questions posed by senators, Bernanke underscored his commitment to remaining on the Fed’s accommodative path.
“Although a long period of low rates could encourage excessive risk taking, and continued close attention to such developments is certainly warranted,” he said, “to this point we do not see potential cost to the increased risk taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation.”
Many Republicans are skeptical of the Fed’s approach, and Sen. Bob Corker charged at Bernanke with a series of sharp questions about the impact of Fed actions. The Tennessee Republican accused Bernanke of launching “a global currency war,” “throwing seniors under the bus” and “working for the [banks] that they regulate.”
Bernanke refuted each criticism one by one, eventually saying, “None of the things you said are accurate.”
Corker’s comment about harming seniors referred to complaints that the Fed’s low interest rate policy is unfair to savers and the elderly who are on fixed incomes. He also said Bernanke’s efforts to boost employment make him “the biggest dove, if you will, since World War II.”
Bernanke said higher interest rates could not be sustained amid a weak economy.
Responding to the ‘dove’ remark, he said, “Well, maybe in some respects I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the post-war period, or at least one of the best.”
Indeed, despite continued warnings from conservatives about higher inflation, the annual inflation rate has averaged 1.6 percent since 2009 and was 1.6 percent in January — below the central bank’s target 2 percent rate of inflation. Unemployment remains at 7.9 percent, and Bernanke has said the Fed will keep interest rates low until it falls to 6.5 percent.
Bernanke testifies before the House Financial Services Committee on Wednesday, where similar debates are expected to take place.