WASHINGTON — Testifying to Congress for the first time since Republicans took control of the House, Federal Reserve Chairman Ben Bernanke said Wednesday he’s confident with the Fed’s fiscal and monetary policies. But he was pressed hard in a series of tough questions.
Bernanke’s confidence was not shared by Paul Ryan, R-Wis., chairman of the House Budget Committee. “Take a look at this week’s Wall Street Journal–inflation is accelerating and people are worrying,” Ryan said holding a copy of the newspaper.
“The inflation is taking place in emerging markets because that’s were the growth and demands is–it’s a global phenomenon,” Bernanke said. “Inflation here in the U.S. is very low. We can’t do anything about bad weather in Russia.”
Inflation and quantitative easing
Some members of the committee worried about the Fed’s use of quantitative easing — or QE, as it’s known — a monetary policy in which the central bank creates money to buy government bonds and financial assets. The Fed will then ultimately sell these assets back into the market. The most-recent policy, QE2, began in November and will end this June.
The Fed purchased $600 billion in long-term securities from the U.S. Treasury. The money allows the Fed to reduce interest rates, thus encouraging Americans to invest and spend. Ryan has said he’s skeptical of the results and worries that the move could lead to sustained inflation.
Reps. Chris Van Hollen, D-Md., Scott Garrett, R-N.J., and John Campbell R-Calif. all voiced similar concerns about QE2.
“What are the metrics that you are following?,” Campbell asked.
“We will be trying to assess whether the recovery is on a sustainable track and looking forward … If inflation begins to rise, then we will reverse it,” Bernanke said.
Bernanke defended the QE2 policy by saying that “stimulation studies” say it has “created 600,000 jobs,” while emphasizing that a sustained period of stronger job growth is needed. Declines in unemployment, he said, are certainly grounds for optimism.
The need for more jobs
Congress and Bernanke agree that economy needs to add more jobs for real growth.
“It will be several years before the unemployment rate has returned to a more normal level,” Bernanke said. “The longer that people stay out of work, the harder it’s going to be for them.”
Campbell asked if the job problem in the U.S. is cyclical or structural.
“I would say that the bulk of it is still cyclical. The risk is if it goes on long enough it will start becoming structural as people lose their skills and their connection to the labor force,” Bernanke said.
Issues in the housing sector
While Bernanke said the Fed positively affected jobs, he side-stepped questions about the Fed’s connection to the housing price bubble that was seen in the 2000s.
In 2008, the government bailed out mortgage finance giants Fannie Mae and Freddie Mac.
In his opening statement, Ryan said he’s concerned that the costs of the Fed’s monetary policy “may come in the form of asset bubbles and prices pressures.”
The idea is that if the market busts (like it did with the recession), interest rates surge and a similar or worse situation as seen before in the housing market may occur.
The government, Bernanke said, should only back home loans as a last resort and should charge for that support. He also noted that construction remains weak and there remain a multitude of vacant and foreclosed homes across the nation.
Garrett pointed out that both former Fed Chairman Alan Greenspan and Bernanke had similar formulas for improving the nation’s economy: “If it didn’t impact the past, why is it going to impact our future?”
Reducing the deficit
After being grilled for the first hour on the Fed’s plan for the future, Bernanke focused the discussion on Congress’ responsibilities.
Bernanke previously said that “failure to raise the debt ceiling would be catastrophic” and “Congress shouldn’t use the debt ceiling as a bargaining chip.” He made his case again before the committee.
“It would be reckless from an economic and financial perspective. We do don’t want to default on our debts,” Bernanke said, “it would be very destructive.”
The committee has the responsibility of deciding whether or not to recommend raising the debt ceiling from the current $14.3 trillion. The government’s budget deficit will be nearly $1.5 trillion this year, the nonpartisan Congressional Budget Office has projected. The deficit was $1.4 trillion in 2009 and $1.3 trillion in 2010.
While veteran congressmen questioned Bernanke and his policies, younger and freshman members of Congress looked to the Fed chairman for advice on the debt ceiling, spending, and tax cuts.
“If you’re in our seat, there aren’t many tools left,” said Rep. Kathy Castor, D-Fla.
“(Congress has to) talk about longer term window, to take actions that are credible and will cut spending more over time,” Bernanke said. “This is a long-term problem. Anything that can be done now that can change that path, those are the kinds of things that will have an impact.”