Federal Reserve Chairman Ben S. Bernanke sought to assure lawmakers the Fed can limit inflation while providing record stimulus and won’t allow consumer prices to rise in return for faster economic growth.
“It will be a similar pattern to what we’ve seen in previous episodes where the Fed cut rates, provided support for the recovery, and when the recovery reached a point of takeoff where it could support itself on its own, then the Fed pulled back, took away the punch bowl,” Bernanke told the House Financial Services Committee today in Washington.
Bernanke, on his second day of testimony to Congress, responded to lawmakers who questioned his ability to control inflation after cutting the Fed’s key interest rate almost to zero and expanding its balance sheet to a record $2.87 trillion in a bid to boost growth.
“There is so much money out there that this thing is going to really go and inflation is going to be a huge problem,” said Representative Stephen Fincher, a Republican from Tennessee.
Republican Representative Jeb Hensarling of Texas questioned why the “greatest monetary and fiscal stimulus thrown at an economy in our history” has failed to reduce unemployment and boost growth, and whether the economy suffered a “profound failure of monetary policy” because of the Fed’s unprecedented actions.
Bernanke disagreed that “there has been no progress” since the near “collapse” of the economy in 2008 and 2009.
“It’s true that the recovery has been slower than we would have liked, but clearly we have made progress in unemployment and in job creation,” Bernanke said. “Financial crises lead to recessions that are slower to mend.”
Bernanke, in prepared remarks, said economic growth is slowing and inflation will probably remain at or below the Fed’s 2 percent objective after energy prices reversed their gains from earlier this year.
“Inflation seems to be well in check,” Bernanke said.
Representative Patrick McHenry, a republican from North Carolina, asked whether it would be “desirable” to tolerate inflation of 3 percent in order to spur the economy.
The Federal Open Market Committee couldn’t boost its 2 percent target for price increases “without losing control of the inflation process,” Bernanke said. “I’m very skeptical that it would increase confidence among businesses and households and increase economic activity.”
Federal Reserve Bank of Chicago President Charles Evans has called on the Fed to commit to low interest rates until the unemployment rate falls below 7 percent or inflation rises above 3 percent.
Bernanke, without referring to Evans, said a higher inflation goal “would create a lot of problems in financial markets.” He added, “I don’t think that’s a strategy that has a lot of support on the Federal Open Market Committee.”
The gauge watched by the Fed, the personal-consumption- expenditures price index, climbed 1.5 percent for the 12 months through May and has averaged a 1.8 percent annual increase since the recession ended in June 2009.
The Fed said today the economy expanded at a “modest to moderate” pace in June and early July, as retail sales and manufacturing cooled in some regions. Manufacturing “continued to expand slowly in most districts,” employment “improved at a tepid pace” and “inflation was modest across most areas,” the central bank said, citing reports from its 12 district banks in its Beige Book survey.
“The sharp drop in crude oil prices in the past few months has brought inflation down,” Bernanke said, repeating written remarks to a Senate panel yesterday.
Fed officials forecast that inflation will range from 1.2 percent to 1.7 percent in 2012. Crude oil futures have declined more than 9 percent this year after posting a gain of as much as 11 percent in February.
Oil rose for a sixth day and touched the highest intraday level since May 30 as U.S. housing starts increased more than forecast and gasoline inventories fell. Crude for August delivery rose 0.7 percent to settle at $89.87 a barrel on the New York Mercantile Exchange.
The Beige Book survey said “price pressures were described as easing in New York, Philadelphia, Atlanta, and San Francisco as energy costs declined” while “wage pressures remained modest.”
“The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke said. He said the Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.”
The Standard & Poor’s 500 Index rose 0.7 percent to 1,372.78 as of 4:14 p.m. in New York amid better-than-estimated earnings. The yield on the 10-year Treasury note remained near a record low, declining two basis points, or 0.02 percentage point, to 1.49 percent.
New U.S. home construction rose in June to the highest level in almost four years, indicating the residential real estate market is strengthening even as other parts of the economy cool.
Housing starts rose 6.9 percent to a 760,000 annual pace after a revised 711,000 rate in May that was faster than initially estimated, the Commerce Department reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 745,000 rate.
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