WASHINGTON — Federal Reserve chairman Ben Bernanke reaffirmed the central bank’s commitment to its massive stimulus program on Tuesday, tamping down speculation of a pullback that spooked stock markets last week.
Testifying before the Senate banking committee, Bernanke said the benefits of efforts to keep interest rates near zero are clear. Sales of homes, autos, and other durable goods have rebounded. That has helped reduce unemployment and build household wealth, which in turn fuel the engine of the economy: consumer spending.
But critics of the central bank’s policies, including some Fed officials, have warned that years of ultra-low interest rates and the Fed’s purchase of billions in bonds each month could lead to serious unintended consequences, such as inflation. On Tuesday, Bernanke addressed those concerns and promised that the Fed would keep its easy-money policies in place “as long as needed.”
“Monetary policy is providing important support to the recovery,” he said.
Fed officials have been debating how and when to stop spending $85 billion a month on government and mortgage bonds to prop up the economy, according to details of the Fed’s most recent policy-making meetings. And recent speeches by Fed officials have focused on the risks of quantitative easing to inflation and financial stability. Even that whiff of potential change in Fed policy was enough to send markets for a tailspin last week.
Bernanke countered each argument in a spirited defense for staying the course. He noted the toll the recent increase in gas prices takes on household budgets and emphasized a job market that “remains generally weak.”
“High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families but also the harm done to the vitality and productive potential of our economy as a whole,” Bernanke said.
He acknowledged that low interest rates might force investors to hunt for higher returns on riskier products, a concern highlighted earlier this month by Fed governor Jeremy Stein. But the Fed has stepped up its monitoring of emerging risks, Bernanke said. He contended that low rates can reduce financial instability by encouraging businesses to use longer-term funding and by lowering the cost of paying off debt.
“We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Bernanke said.
He also tried to assure lawmakers that the Fed would unwind its stimulus smoothly. Critics have worried that inflation expectations could rise if the Fed bungles its exit.
“I think we have the technical means to unwind at the appropriate time,” he said.
Many of the lawmakers’ questions focused on the impact of the across-the-board federal spending cuts.
The Congressional Budget Office estimates the cuts would shave 0.6 percentage points of economic growth this year.
Bernanke recommended replacing front-loaded cuts with gradual reductions over time.
Senator Elizabeth Warren, Democrat of Massachusetts, and Senator David Vitter, Republican of Louisiana, pointed out that the cost of funds for big banks is lower than for small ones because investors believe the government will bail them out.
Bernanke agreed that too-big-to-fail should end but said the Fed’s rule-making process is “moving in the right direction.”
Warren countered: “Any idea about when we’re gonna arrive in the right direction?”