By Neil Irwin
Washington Post Staff Writer
Wednesday, January 5, 2011; 11:09 PM
After a tumultuous 2010, what is on tap for Ben S. Bernanke and the Federal Reserve in 2011? A lot of watching, a good bit of waiting and some preemptive efforts to help steer the United States away from economic risks it could face in the coming years.
The Fed is in the process of buying $600 billion in Treasury bonds under a much-debated program announced in November that is meant to prop up growth. Amid new signs that the economic outlook is improving - on Wednesday, there were strong readings on the job market and service industries in December - it is now likely that the Fed will allow the bond-purchase program to continue through its scheduled expiration in June but will not make purchases after that.
"There is a lot of inertia in this policy," said Peter Hooper, chief economist at Deutsche Bank Securities. "It would take a pretty big break in the data one way or the other for them to either end the program early or extend it beyond June."
With policy in a holding pattern, Chairman Bernanke and the Fed will be occupied in other ways: primarily monitoring the economy, trying to gauge whether it is recovering and determining what role the Fed's actions played in any improvement. And they will be on the watch for emerging risks that could undermine the path of steady growth - the most obvious possibilities being further financial troubles in Europe or a failure of the U.S. government to put its own finances on a sustainable footing.
Bernanke will probably use his bully pulpit to nudge Congress and the Obama administration toward a long-term plan for reining in the budget deficit, which will be about 9 percent of gross domestic product this year. That pitch will begin Friday, when he testifies before the Senate Budget Committee, his first appearance before lawmakers since September.
He has made the case both publicly and in private conversations with lawmakers that developing a path to lower budget deficits over time could pay benefits now by increasing investor confidence in the future, and he is likely to make that idea a theme in public comments this year.
A key Bernanke lieutenant, Fed Vice Chairman Janet Yellen, said in a recent speech that if a credible deficit-reduction plan is not developed, financial markets could force the issue by demanding higher interest rates for lending money to the U.S. government.
"The sooner we start addressing the longer-term budget problem, the less wrenching the adjustment will have to be and the more control we - rather than market forces or international creditors - will have over the timing, size and composition of the necessary adjustments," Yellen said Dec. 1 in New York.
Economic data have taken a more positive tone in recent weeks. The Institute for Supply Management said Wednesday that its December index of activity at non-manufacturing businesses showed the strongest pace of growth at such firms since 2006, a surprisingly strong rise in the index to 57.1, from 55.
And the payroll processing firm ADP said private firms added 297,000 jobs in December, triple the number economists had forecast. That figure reflects some one-time factors, but it nonetheless raised hopes that the job market is finally improving enough to bring down unemployment. The Labor Department will issue its report on the December employment situation Friday, just an hour before Bernanke is scheduled to testify. Analysts expect the report to show 150,000 net jobs created and unemployment edging down to 9.7 percent, from 9.8 percent.
"I am increasingly confident that the recovery is both sustainable and likely to gain strength over the next several quarters," Thomas Hoenig, president of the Kansas City Fed, said in a speech Wednesday.
Fed officials view the recent improvement in the economy as vindication of their Nov. 3 decision to buy $600 billion in Treasury bonds, a move that drew sharp criticism from some congressional Republicans. While Bernanke has met privately with many lawmakers since the decision, Friday's testimony will be the first chance for him to defend it publicly against skeptical members of Congress.
Bernanke and his colleagues also are likely to encounter disagreements within the Fed as they evaluate future policies. Once the bond purchases are complete in June, some Fed policymakers are likely to advocate unwinding the central bank's exceptional pro-growth approach sooner than others. Richard Fisher, president of the Dallas Fed, and Charles Plosser, president of the Philadelphia Fed, are likely to be the most vocal officials with votes on the policy committee this year, perhaps breaking from the consensus of their colleagues.
In his speech Wednesday, Hoenig, who dissented from his Fed colleagues at every policy meeting in 2010, argued that such open disagreement is healthy for the central bank.
"The role of open dissent is at least as critical to FOMC [Federal Open Market Committee] monetary policy decisions as it is to deliberations by the Supreme Court, the United States Congress or any other body with important public responsibilities," he said.