Could Bernanke's Testimony Signal an Early End to Easy Money?

Updated: February 26, 2013 | 8:37 a.m.
February 26, 2013 | 6:03 a.m.

Federal Reserve Board Chairman Ben Bernanke will be grilled by lawmakers this week on the central banks bond-buying program known as QE3. (AP Photo/Dennis Cook)

The Federal Reserve's balance sheet continues to grow. But for how long?

Folks from Wall Street to Washington are hoping for a better sense this week of when the central bank’s latest unemployment-fighting program, an open-ended round of bond-buying known as QE3, will come to an end.

For some congressional Republicans, the end of the stimulus program would be a relief. They fear the Federal Reserve Board may be sowing the seeds of inflation or inflating the next asset bubble, pushing on a string--a risky string--when in reality it can do no more to help the economy. Some Democrats, on the other hand, worry the Fed will back off its easy-money stance before the labor market is healed. (In addition to bond-buying, the Fed has also pledged to keep interest rates near zero until unemployment falls below 6.5 percent, as long as inflation remains contained).

Both sides will have a chance to question Fed Reserve Board Chairman Ben Bernanke when he makes his semiannual appearance before the Senate Banking on Tuesday and the House Financial Services Committees on Wednesday.

The nonpartisan and politically independent Fed is caught between the two sides, with a dual mandate that tasks it with maintaining price stability and maximum employment. For now, inflation remains contained, and the Fed is focused on bringing down the unemployment rate. When it launched QE3 in September, the Fed vowed to continue its steady asset purchases until the labor market’s outlook improved “substantially.”

Now, there’s little improvement in the job market, but there has been growing chatter about the risks of the Fed’s easy-money policies and speculation that the bank could draw QE3 to a close sooner than initially expected. In December, the Federal Reserve pledged to buy $85 billion a month in longer-term Treasury securities and mortgage-backed securities under the program.

All but one official on the 12-member policy-setting panel, the Federal Open Market Committee, voted for the move. But questions arose over whether the central bank would keep buying bonds when the minutes from the FOMC meeting in late January were made public last week. “A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred,” the minutes said. Right now, unemployment is 7.9 percent, well above the Fed’s longer-run forecast of 5.2 to 6.0 percent.

Lawmakers are also expected to press Bernanke on the economic risks of across-the-board spending cuts known as sequestration, which will kick in on Friday if Congress fails to act. Bernanke has refused to take sides on congressional budget issues in the past, except to caution when dramatic fiscal events, such as the 2012 year-end fiscal cliff, run the risk of slowing economic growth.