Fed's actions were needed to boost global economy, Bernanke tells detractors
Friday, November 19, 2010; 5:38 AM
Federal Reserve Chairman Ben S. Bernanke is hitting back at the major nations that have assailed the Fed's latest actions to try to boost growth, offering a blunt argument that the steps were needed to keep the U.S. economy growing - and, by extension, to keep the global recovery on track.
But the Fed can't fix the economy alone, he argued in a speech Friday morning in Frankfurt, Germany that endorsed in the most explicit terms yet the notion that Congress should also take near-term action to address the weak economy.
In Germany, a nation that has pilloried the Fed for its decision to buy $600 billion in bonds with newly created money, Bernanke argued that the action was essential to reduce joblessness and maintain a strong dollar over the long run.
"On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for years," Bernanke said. "As a society, we should find that outcome unacceptable."
The Fed has drawn attacks from many quarters since its Nov. 3 decision, which was designed to lower long-term interest rates and encourage growth. The German, Chinese, Brazilian and other major governments have accused the Fed of trying to manipulate the value of the dollar, making U.S. exporters more competitive. Some Republicans in Congress have expressed deep skepticism of the move, even arguing to change the Fed's mandate so that it is no longer charged with trying to keep unemployment low.
Bernanke's speech at a European Central Bank conference amounts to a full-throated rebuttal, a departure from the reserved tone he usually uses to discuss monetary policy.
The Fed's action was justified by U.S. economic conditions, Bernanke argued. He said he expects growth will pick up next year but added that "we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery."
And strong U.S. economic growth is just what the broader world economy needs, Bernanke said. "Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole."
The United States needs to do more, Bernanke argued, calling for Congress and the Obama administration to take action to encourage growth. Bernanke in the past has privately supported fiscal measures such as temporary tax cuts or spending increases, and has acknowledged in congressional testimony that such policies could be helpful. But he has not previously endorsed these steps in a speech.
"A fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve," Bernanke said, adding that the Fed is "nonpartisan" and does not support specific tax and spending programs.
Addressing critics, including major exporters such as Germany and China that have accused the Fed of unfairly trying to boost U.S. trade, Bernanke argued that his policies seek to create a global economy where there is better balance between what countries produce and consume.
The Fed policy committee "believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States," he said.
The Frankfurt speech is the latest and most dramatic step in a campaign by the Fed to push back against criticism of its decision.
On Wednesday, Bernanke met privately with members of the Senate Banking Committee, assuring them that the Fed would not allow inflation to rise excessively. Sen. Richard C. Shelby (R-Ala.) told reporters that Bernanke estimated the Fed's action would create 700,000 to 1 million jobs over the coming two years.
Many Republican members of Congress remain skeptical. Sen. Bob Corker (Tenn.) and Rep. Mike Pence (Ind.) have called for the very mission of the Fed to be overhauled. The Fed is charged by Congress with a "dual mandate" of maintaining stable prices and full employment. Corker and Pence argue that the Fed, like many central banks overseas, should focus only on keeping inflation low.
Many of Bernanke's colleagues have been defending the policy publicly, including Cleveland Fed President Sandra Pianalto and Minneapolis Fed President Narayana Kocherlakota.
There are divisions, however, even among Fed leaders. During a speech in Washington on Thursday, Philadelphia Fed President Charles Plosser said that he was "terribly concerned about unemployment," but that he was "worried that monetary policy isn't the right set of tools at this juncture."