Heading into today’s testimony before the Joint Economic Committee of Congress, Ben Bernanke was expected to get grilled on the danger presented by the Fed’s $85 billion-a-month bond-buying program, its plans to wind down that “quantitative easing” and the broader challenges facing an economy that’s growing only moderately.
Bernanke, though, had a message of his own to deliver again, and he put it as bluntly as a Federal Reserve chairman can. Fiscal policy “has become significantly more restrictive,” he said. “In particular, the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.”
Bernanke also repeated a message he’s sent before, saying that “with short-term interest rates already close to zero, monetary policy does not have the capacity to fully offset an economic headwind of that magnitude.” And he sought to provide some assurance that the Fed is appropriately weighing the effects of the massive buildup in its balance sheet resulting from its bond buying – and planning for how to tighten monetary policy when needed without damaging the economy or disrupting markets.
In that prepared testimony and other answers to committee members, Bernanke essentially said that the Fed has done about as much as it can about as well as it can – and that policymakers need to reexamine how they are balancing the desire for economic improvement now with the need for fiscal tightening in the long run. He also noted that the recent tax hikes and spending cuts, including sequestration, haven’t really done much to address the long-term budget issues.
Bernanke has made these basic arguments repeatedly, but his message clearly hasn’t resonated with members of Congress more worried about the risks from what they perceive as an overly aggressive central bank. The conceptual tensions were on view from the start of Bernanke’s questioning by Rep. Kevin Brady, R-Texas, the chairman of the Joint Economic Committee. “It’s frustrating. Here we are nearly four years after the recession ended and this economy is in such a weak state, a fragile state,” Brady told Bernanke. “I feel like the economy is in the outpatient room and the Fed continues to feed it medicine on a daily basis, asking ‘Are you getting better?’ But my worry is the Fed doesn’t have the prescription for what ails our economy.”
Bernanke defended the Fed’s policies and argued that the problem isn’t that the Fed is doing too much but that fiscal policymakers are doing too little. “Mr. Chairman, first of all, the slowness of the recovery can be explained by a number of important headwinds, including the aftereffects of the financial crisis, developments in Europe, the problems with the housing market and, very importantly, the fact that fiscal policy for the last few years has actually been a significant headwind to recovery rather than a supporting tailwind,” Bernanke said. “So I would submit that without monetary policy’s aggressive actions, this recovery would be much weaker than it has been, and indeed if you compare our recovery to that of Europe and other advanced industrial economies, it looks relatively good.”
Bernanke also made clear that he wasn’t looking to downplay the significance of the long-term budget issues. “I fully realize the importance of budgetary responsibility, but I would argue that it’s not responsible to focus all of the restraint on the very near term and do nothing about the long term, which is where most of the problem exists,” Bernanke said in response to questioning from Democratic Minnesota Sen. Amy Klobuchar. “I do think that we would all be better off, with no loss to fiscal sustainability or market confidence, if we had somewhat less restraint in the very near term – this year and next year, say – and more aggressive action to address these very real long-term issues, which threaten within a decade or so to begin to put our fiscal budget on an unsustainable path.”