Federal Reserve Chairman Ben Bernanke delivered testimony to the United States Congressional Joint Economic Committee on Wednesday. Bernanke told lawmakers that the economy is stronger now, but warned that any brakes on its aggressive monetary policy or stimulus could hinder any significant economic growth.
During the Q&A session, Bernanke showed no sign of slowing down the central bank’s quantitative easing program of purchasing $85 billion a month in mortgage-backed securities and Treasury bonds. He did note that any reduction in its bond-buying initiative prior to Labor Day would depend on pending economic data.
“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,” Bernanke said in his speech to legislators.
In the event that data shows no need for the Fed then it could scale back the pace of bond acquisitions over the course of the next few meetings. This led to the markets to experience a decline, especially since stocks depend on the Fed’s billions of dollar in stimulus.
It should be noted that the Fed still has no intention to scale back its efforts. In fact, the central bank head iterated that he was prepared to increase the pace of its bond purchases if the data calls for it.
Bernanke listed the “significant benefits” of quantitative easing. Near the end of his prepared remarks, Bernanke said essentially that the Fed’s policies are needed to accommodate a healthy economy in order to provide real rates of returns to savers and investors.
Minutes released from the latest Federal Open Market Committee (FOMC) showed divisions among the board members over winding down the measures. This is something that was reported on in the last meeting earlier this month.
“A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth,” the minutes stated.
“However, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so.”
During the Thursday trading session, Asian markets plummeted following Bernanke’s comments and weak factory activity in China; Japan’s Nikkei index, for instance, fell six percent.
It seems members of Congress are looking to encourage the Fed to exit its strategy. California Republican Congressman and House Oversight and Government Reform Committee Chairman Darrell Issa and Ohio Republican Congressman Jim Jordan met privately with Bernanke last week after the two representatives sent a letter to the Fed on Apr. 22.
Other GOP members also see the Fed’s efforts not enhancing the economy in any way. Texas Republican Congressman and House Financial Services Chairman Jeb Hensarling highlighted his concerns over the paucity of growth, despite the Fed’s tremendous involvement in the overall economy.
“Like a patient who has been administered too many antibiotics, the economy is less and less responsive to the Fed’s continued monetary stimulus,” said the Texas Republican. “If the Fed wants to help the economy, it needs to adopt a more predictable, rules-based policy that aims for long-term price stability.”
Ron Paul responds
Three-time presidential candidate and longtime Fed critic Ron Paul issued a statement soon after the hearing came to an end. His remarks included accusing Bernanke of “grossly misleading the American people” because he stated that inflation is restrained.
“Just yesterday, it was reported that the median home price in Houston is at an all-time high, having risen 14.5 percent in the last year alone. Americans are struggling with soaring food and energy prices that the federal government conveniently chooses to ignore in its measure of inflation in order to hide the true effects of its policies from the American people,” stated the former Texas Republican Congressman.
“The real measure of inflation is the increase in the monetary supply, and the Federal Reserve has increased the Federal Reserve credit by 17.4 percent in the last year alone. The reality is, the Federal Reserve’s policy of monetary expansion through the buying of up to $100 billion of securities each month may help the big-spenders in Congress and their cronies in the banking sector, but it is harming the rest of America.”
Paul concluded by stating the monetary base expansion will cause prices to soar and lead to the average person’s standard of living to erode.
“Until our leaders understand that we cannot print our way to prosperity, the American people will continue to suffer the disastrous effects of higher prices, higher unemployment, and lower standards of living and qualities of life for years to come.”