Bernanke Defends Low Interest Rates As Necessary
Business + Economy

Bernanke Defends Low Interest Rates As Necessary

REUTERS/Larry Downing

The Federal Reserve Board chairman and powerful head of the House Budget committee squared off over monetary policy on Thursday, with Ben Bernanke defending the current low interest rates as necessary to stimulate the sluggish economy, while Wisconsin Republican Paul Ryan called for the Fed to abandon its concern with unemployment and focus instead on maintaining low inflation.

The standoff reflected an emerging theme from Republicans on Capitol Hill as they gear up to run for reelection this fall and seek to maintain control of the House. In an effort to curry favor with seniors who supplement their Social Security with interest from certificates of deposit, Ryan and other Republicans on the committee repeatedly charged that the Fed’s low interest rates penalized savers without doing anything to encourage investment, create jobs or resolve the housing foreclosure crisis, and would eventually lead to much higher inflation.

The Federal Reserve by law is required to maintain stable prices and low unemployment. When both inflation and unemployment are high, the so-called “twin mandate” can present Fed policymakers with a quandary. But with inflation low and expected to stay that way, the Fed recently announced it will maintain today’s extraordinarily low interest rates – 0 to ¼ percent – at least 2014.

“It seems as if you’re moving away from an inflation target,” Ryan charged. The Fed’s recent policy “says if the deviation is higher in unemployment . . . the Fed is willing to chase higher inflation in order to meet your employment mandate.”

Bernanke pointed out that current economic conditions – an inflation rate below the Fed’s target rate of 2 percent, a stable dollar, and unemployment three percentage points above what the Fed now considers full employment – belied those claims. “In an environment of well-anchored inflation expectations, more -stable commodity prices, and substantial slack in labor and product markets, we expect inflation to remain subdued,” he said. But at the same time, he said, “We will not actively seek to raise inflation or to move away from the target.” He promised to withdraw monetary stimulus should prices begin to rise faster than the Fed’s target.

Demands that the Federal Reserve abandon the employment mandate were quickly seized on by Democrats on the committee, who said monetary policy was the only tool left to federal policymakers in an environment of fiscal austerity. Rep. Chris Van Hollen, D-Md., and the ranking member on the committee, noted that the Fed’s economic forecast was significantly higher than the sluggish growth projected by the Congressional Budget Office earlier this week.
“To deprive you of the tools to boost employment would be a big mistake,” Van Hollen said. “Without those tools, the economy today would be in much worse shape.”

In his prepared testimony, Bernanke noted that the housing crisis continued to weigh down consumer spending, and under questioning, defended a recent Fed report that offered potential approaches to helping struggling homeowners. Some of those approaches were offered by the Obama administration this week. On the other hand, “the business sector has been a relative bright spot in the current recovery,” he noted, with “manufacdturing production [up] 15 percent since its trough.” Moreover, while business investment slowed in the second half of 2011 due to last August’s debt ceiling standoff and European debt concerns, “there are signs that these concerns are abating somewhat,” he said. “If business confidence continues to improve, U.S. firms should be well positioned to increase both capital spending and hiring.”