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Federal Reserve Chairman Ben Bernanke drew criticism from Republican lawmakers on Thursday for the Federal Reserve’s decision to hold short-term interest rates near zero until late 2014.
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Bernanke gave testimony before the House Budget Committee in Washington today, where Congressional Republicans criticized the Federal Reserve for working to reduce unemployment and revive the housing market instead of focusing exclusively on inflation.
“I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar,” said Rep. Paul Ryan (R-Wis.), who chairs the committee. “The prospect of all three is adding to uncertainty and holding our economy back.”
Bernanke defended the Fed’s actions, telling the committee that the economy, particularly the housing market, needs help for years to come, both from the Fed and from Congress. He reiterated the Fed’s assessment, released last week, that the economy still faces significant hurdles in the way of its recovery, including housing and the European debt crisis.
Bernanke used the opportunity to urge Congress to confront “the urgent issue of fiscal sustainability” by reducing the federal debt, but cautioned lawmakers not to cut spending or raise taxes too quickly, as doing so could undermine the economic recovery. Reducing the federal debt would spur growth, he said, by improving the confidence of businesses and consumers.
Republicans expressed their concern that the Fed’s massive efforts to spur job growth may eventually result in unmanageable inflation.
Last week, the Fed published for the first time a formal interpretation of its Congressional mandate, saying that it would seek 2 percent annual inflation, and to limit unemployment, and that sometimes one goal would take priority over the other.
“My interpretation is that the Fed is willing to accept higher levels of inflation than your preferred rate in order to chase your unemployment mandate,” said Ryan.
While Bernanke responded that the Fed would not “actively seek” to raise inflation, he did say that, should inflation and unemployment both rise above targets, the Fed may choose to reduce inflation more slowly in order to reduce unemployment more quickly.
Ryan took that as confirmation that “higher-than-preferred inflation may be tolerated,” but committee Democrats defended Bernanke, saying that the Fed should be focused on unemployment because there are 24 million Americans who cannot find full-time jobs.
“To deprive you of the tools necessary to boost employment would be a big mistake,” said Rep. Chris Van Hollen, the committee’s ranking Democrat. “Indeed, without those tools, the economy today would be in much worse shape.”
It was then Bernanke’s turn to express his concerns about Congress, particularly how they intended to deal with the budget deficit.
“To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time,” Bernanke said. “Achieving this goal should be a top priority.”
Congress should also “take care not to unnecessarily impede the current economic recovery,” Bernanke said in a warning to Ryan, who has led the call for government spending cuts, proposing a plan last year to reduce deficits by cutting a whopping $6.2 trillion from the federal budget over the next ten years. Ryan’s proposal would have saved money by cutting Medicare and scores of other programs, including Medicaid, food stamps, farm subsidies, and Pell grants.
When asked by Democrats why the Fed was not taking an even stronger position on housing issues, Bernanke said that the Fed maintained its opinion that Congress should do more.
“I think it would repay your efforts,” he said, “to remove some of the barriers to a recovery in housing.”
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