Bernanke Favors Continued Fed Stimulus

Fed Chairman Ben Bernanke addressed the Joint Economic Committee of Congress Wednesday morning. He faced some opposition from those who believe that the Fed's easy money policies from low rates and bond purchases were hurting savers, fostering financial imbalances, and could be creating inflation in the future when banks begin loaning funds from the reserves now on their balance sheets. However, while acknowledging those concerns, he said that the benefits of the current low-rate policy and, in particular, the bond purchase program, outweighed their potential costs. Addressing low returns to savers and risks to financial stability, he noted, “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.” He is concerned about the high rate of joblessness, particularly among younger adults. To address high unemployment rates, he emphasized the need for continued accommodation, saying, “With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy.” One of his concerns is that, aside from the financial stresses on households, high unemployment rates “also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.” And yes, those fiscal challenges are a problem, he says. Not only is the federal government cutting spending and raising taxes, but local and state governments are also tightening their budgets. Bernanke says that the Fed cannot entirely offset those fiscal headwinds, and that governments' cutting their budgets would likely reduce GDP in 2013 by about 1 ½ percentage points vs. what economic growth would be otherwise. He notes that a stronger economy would help government at all levels better balance their budgets and that fiscal policy should help, not hurt, economic growth in the current environment. After all, the Fed can only do so much. Even so, he notes that the Fed's policies are helping the economy. He said, “In the current economic environment, monetary policy is providing significant benefits. Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment.” He also remarked that inflation has been low and inflation expectations – which can themself drive future inflation – have been contained. The Fed had been trying to increase inflation to its two percent target, as the risks of deflation are problematic; simply witness Japan's travails. An increase in inflation from its current one percent rate would reduce real interest rates, or interest rates minus inflation. Lower real interest rates engineered in part by higher inflation can thus stimulate the economy. Low inflation also allows the Fed to continue its accommodative stance at the same time it may even require such monetary stimulus to combat any deflationary forces. Bernanke notes that, “importantly, accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the Committee's 2 percent longer-run objective.” In concluding his prepared remarks, he observed, “Because only a healthy economy can deliver sustainably high real rates of return to savers and investors, the best way to achieve higher returns in the medium term and beyond is for the Federal Reserve--consistent with its congressional mandate--to provide policy accommodation as needed to foster maximum employment and price stability.” Thus, the bond buying program is likely to continue for the time being. Interested in learning the fundamentals of investing? Benzinga's Marketfy has a great deal on Groupon right now that can help get you started!