Bernanke Defends Fed Policies Against GOP Critics

Published February 2, 2012 5:36PM (EST)

WASHINGTON (AP) — Ben Bernanke defended the Federal Reserve's decision to hold interest rates at record-low levels for the next three years, during a contentious hearing before federal lawmakers.

The Fed chief told the House Budget Committee Thursday that the central bank's plan is an appropriate step to combat high unemployment while inflation is stable.

Bernanke was challenged immediately on the issue by the panel's chairman, Paul Ryan, a Wisconsin Republican, who said the Fed's move would risk higher inflation and hurt growth.

"I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar," Ryan told Bernanke. "The prospect of all three is adding to uncertainty and holding our economy back."

Bernanke disagreed. He said prices have stabilized since spiking in early 2011 and the dollar has shown no signs of weakening.

The Federal Reserve chairman testified one week after the Fed signaled that a full recovery could take at least three more years. As a result, the Fed said it doesn't plan to raise its benchmark interest rate from a record low before late 2014 at the earliest.

But the questions from lawmakers covered a range of topics, from Europe's debt crisis to the surging federal deficit. One member even accused Bernanke and the Fed of overstepping their authority.

Rep. Scott Garrett, R-N.J., said the Fed ventured into Congress's territory when it issued a white paper last month exploring proposals to rescue the troubled housing market. He compared that move to the House floor instructing the Fed on monetary policy — the Fed's use of interest rates to try to boost or slow the economy.

"I was taken aback when the Fed issued an unsolicited white paper on housing policy and it mirrored in many ways the administration's policies on housing," Garrett, scolded Bernanke.

Bernanke apologized if Garrett felt the Fed went too far. He said that the weak housing sector was holding back overall growth and that this was of great concern for the Fed. He said the central bank did not endorse any actions but instead just explored various policy options.

"We were trying to provide pros and cons," Bernanke said.

Bernanke also urged lawmakers to balance their desire to cut deficits with policies that could help boost the weak U.S. economy in the short run.

"Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery," Bernanke said. "Fortunately, the two goals ... are fully compatible."

Earlier this week, the Congressional Budget Office estimated that the deficit will top $1 trillion for a fourth straight year and could stay around that level for years.

A key reason the deficit has surged in the past four years is that the government collected less tax revenue. In part, that's because the economy has yet to regain the millions of jobs lost during the Great Recession.

And the government has had to spend more on emergency unemployment benefits and efforts to boost growth, such as the Social Security tax cut that will expire in February unless Congress extends it.

The Fed has taken extraordinary measures during and after the recession to try to help the economy recover. In June, it completed its second round of bond buying.

At a news conference after last week's Fed meeting, Bernanke said a third round of bond buying might be necessary. Some economists think the Fed could announce more bond buying as soon as its next meeting in March.

By Salon Staff

MORE FROM Salon Staff

Related Topics ------------------------------------------