Federal Reserve Board Chairman Ben Bernanke defended the central bank’s controversial new round of bond-buying, using a speech in Indianapolis on Monday to respond to a barrage of criticisms that the bank has faced since announcing the move last month.
The Fed kicked off its latest round of bond-buying, known to Wall Street as quantitative easing or QE3, on Sept. 13. With fiscal policy on hold amid gridlock in Congress, the burden jump-start the sluggish economy rested on the central bank. The Fed has found itself in the political crosshairs in the aftermath of its QE announcement, which came just 54 days before the presidential election. Many Republican lawmakers have warned that the action could lead to inflation and set the stage for a reckless fiscal policy by allowing the government to borrow money at low rates.
Bernanke offered a point-by-point rebuttal to his critics. He said he found the fiscal-policy argument "unpersuasive."
The Fed is committed to its dual mandate of maximum employment and price stability--mandated by law--and doesn’t try to influence the political debate on the budget, Bernanke said, adding that such an effort would be “highly inappropriate.” He also cautioned that raising interest rates for the purpose of discouraging government borrowing would likely backfire and widen the deficit.
Bernanke repeated his frequent plea to Congress to put the country on a sustainable fiscal path without the abrupt tightening associated with going over the so-called fiscal cliff, a combination of tax hikes and spending cuts scheduled to take place at the end of the year if Congress fails to act.
The Fed chairman also addressed recent attempts in Congress to subject the central bank's monetary policy decision-making process to a congressional audit, something it has historically been exempt from. Bernanke warned this summer that such a move could have a "chilling effect" on the bank's policies by subjecting it to short-term political pressure. A bill to remove the exemption passed the House this summer.
On Monday, he reiterated his warning about the harmful effects that would ensue if the bill became law. “A perceived politicization of monetary policy would reduce public confidence in the ability of the Federal Reserve to make its policy decisions based strictly on what is good for the economy in the longer term,” he said.
Bernanke addressed other criticisms, including the potential for the bank's accommodative policies to hurt savers and investors.That impact was outweighed by the benefits low interest rates can provide to the overall economy, he said. Bernanke also disputed the notion that inflation would soar and the Fed would be powerless to stop it. “I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way,” he said, adding that he and his colleagues on the board would carefully consider how to step away from the easy policies when the time is right.
Sen. David Vitter, R-La., a frequent critic of the Federal Reserve, said last month that QE3 had put the country on the fast track to "rampant inflation and potentially a return to a world with 20 percent interest rates."
"Chairman Bernanke needs to show some restraint and allow this economy to develop based on the fundamentals rather than the sugar high this action provides the stock market,” Vitter added. Republican presidential nominee Mitt Romney has also compared QE3 to a sugar high.
The Fed's chief's Indianapolis speech was reminiscent of his letter to House Oversight Committee Chairman Darrell Issa, R-Calif., this summer, in which he defended the central bank Fed in responses to 22 questions Issa had posed earlier that month.