Bernanke dismisses inflation concerns, says unemployment turnaround will take years

By Neil Irwin
Washington Post Staff Writer
Friday, February 4, 2011; A12

The economy is poised to grow more rapidly this year, Federal Reserve Chairman Ben S. Bernanke said Thursday, dismissing fears that rising fuel prices will trigger broad-based inflation. But he emphasized that it will still take several years before the unemployment rate comes down to normal levels.

Speaking at the National Press Club and, in a rare step, taking questions from journalists, Bernanke gave a mixed assessment of the nation's economic prospects but left little doubt that he views getting the job market on track as the top priority for the Fed.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," Bernanke said.

He also appeared unconcerned that the recent surge in the prices of commodities means the nation is on the verge of a problematic outburst of inflation, saying that "overall, inflation remains quite low."

Taken together, the comments suggest that despite signs of economic growth and inflation risks, the Fed will not reconsider anytime soon its policies of keeping interest rates ultralow and flooding the economy with cash.

Bernanke maintained his view that the Fed's program of buying $600 billion in Treasurys to try to prop up growth, announced in November, is working: stock prices have risen; the stock market has become less jumpy; companies are able to borrow money more cheaply; and inflation expectations have risen a bit. All were expected results, he said.

Appearing in a setting that resembled a news conference - the last such appearance where he took open-ended questions from journalists was two years ago, also at the press club - Bernanke said that a Fed committee was studying the possibility of having regular news conferences and will make its recommendations "pretty soon."

Responding to a question, Bernanke deflected the suggestion that the Fed's easy-money policies are a major cause of rising global food prices, which contributed to political instability in Egypt and Tunisia.

He said that rising prices for grain, rice and other food staples is the result of increased demand from rapidly growing economies in developing nations. He also noted that Egyptians buy food using their local currency, not dollars, and arguing that U.S. monetary policy cannot significantly affect food prices there.

"Federal Reserve policy cannot be primarily responsible," Bernanke said. "Clearly what's happening is not a dollar effect. What's happening is a growth effect, primarily in emerging markets, that is driving up prices."

On Thursday, crude oil closed at $90.54, about $4 higher from a week earlier. The increase was triggered in part by political turmoil in Egypt.

Asked whether the Fed's monetary easing was driving up the stock market, the chairman said the policy is indeed increasing the prices of stocks and other risky assets, just as the Fed's normal policy tool - raising and lowering interest rates - works in part by affecting financial markets.

As to whether the Fed may consider expanding the $600 billion program beyond its scheduled expiration in June, Bernanke said that the board is reviewing the initiative regularly and that "we want to make sure it's working as intended and not having adverse side effects."

As he has in the past, the Fed chairman warned that the United States is on an unsustainable fiscal course.

Quoting the economist Herbert Stein in saying that "if something cannot go on forever, it will stop," Bernanke said that the federal government must stabilize its budget.

The question, he said, "is whether these adjustments will take place through a . . . careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis."

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