Federal Reserve Chairman Ben Bernanke told a Senate hearing Tuesday that the Fed intends to keep its stimulus policies going until the job market improves significantly, partly allaying recent concerns that it might soon rein in its bond-buying.
The bond purchases are "providing important support to the recovery while keeping inflation close to" the Fed's 2% goal, he told the Senate Banking Committee in a hearing that grew testy at times as Republican members criticized the program.
Bernanke cited in more detail than he had previously the risks of the Fed's monthly purchases of $85 billion in Treasuries and mortgage-backed securities, which are aimed at holding down long-term interest rates. He said the program could stoke inflation or spur excessive risk-taking by investors who sell low-yielding bonds to seek higher returns in stocks or commodities. That could ultimately lead to asset bubbles.
But he said inflation is "subdued" and he doesn't see the costs of risk-taking "as outweighing the benefits of promoting a stronger" recovery.
Still, in a sharp exchange, Sen. Bob Corker, R-Tenn., asked Bernanke if he ever weighs the Fed's policies that throw "seniors under the bus" by keeping interest rates on savings low.
"I think one concern we have is about the effect of long-term unemployment," Bernanke replied, noting many of those out of work at least six months are "never going to be a productive part of our workforce."
The verbal jousting turned more personal when Corker accused him of being too willing to risk inflation to promote job growth, or being a "dove," in Fed parlance. "I don't think there's any question that you would be the biggest dove since World War II," Corker said. "I think it's something you're rather proud of."
Bernanke was ready with a retort: "You called me a dove. Well, maybe in some respects I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the postwar period."
Worries that the Fed might soon end or reduce its bond-buying arose last week after minutes of the Fed's Jan. 29-30 meeting were released. According to the minutes, "a number" of Fed officials said risks such as inflation could prompt the Fed to "taper or end" the purchases before the job outlook gets substantially better, seemingly undercutting a road map the Fed has emphasized for months.
That drove stocks down. But Barclays Capital said Bernanke's testimony "gave no signal" the purchases will be slowed or stopped soon.
Bernanke also urged Congress and the White House to temper the $85 billion in federal spending cuts slated to take effect March 1. He said the cuts would put a "significant" burden on the economy. Instead, "Congress and the administration should consider replacing the sharp, front-loaded spending cuts with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."
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