When the time comes, the Federal Reserve will raise interest rates to keep inflation under control, Fed Chairman Ben Bernanke said Monday, adding that that time could be far away.
With the U.S. economy still very fragile and unemployment so high, inflation isn’t a pressing problem right now, Bernanke said in a talk to a group of economists in Washington.
For now, getting the economy back on its feet is the top priority. “We have come a long way from the darkest period of the crisis, but we have some distance yet to go,” Bernanke said, according to the text of his remarks released in Washington. Read Bernanke’s speech.
“Significant headwinds remain, including tight credit and a weak job market,” he said.
Bernanke’s talk was titled “Frequently Asked Questions.” The most frequently asked question of the Fed right now is: Will the Fed let inflation get out of hand?
“The answer is no,” Bernanke said. “The Fed is committed to keeping inflation low and will be able to do so.” However, inflation “appears likely to remain subdued for some time.”
Bernanke’s remarks broke no new ground; he repeated the message he’s been giving for months:
*
The economy is recovering, but is not growing fast enough to create many new jobs. Financial conditions have improved, but small businesses and households are still having a hard time getting credit. With jobs growing only slowly, consumer spending won’t accelerate, and neither will consumer inflation.
*
To prevent a recurrence of the financial crisis, the Congress needs to approve new powers that would make sure Wall Street — not taxpayers — pays for the next failure of a “too-big-to-fail” financial institution. And, by the way, the Fed needs new authorities as well to monitor the stability of the economy.
*
The Fed, in conjunction with other central banks and U.S. agencies, averted “a global financial meltdown that could have plunged the world into a second Great Depression.” Because of Fed support for the financial system, businesses and consumers have greater access to credit than they would have had, and that is helping the economy to recover.
*
Proposals to “audit” the Fed are a thinly disguised attempt to let Congress second-guess monetary policy decisions, and have nothing to do with the Fed’s books or accounts.
Bernanke’s remarks come just over a week before the Federal Open Market Committee gathers in Washington for a two-day meeting.
No one expects any major changes in policies at the Dec. 15 and 16 meeting, but observers will be watching for subtle and not-so-subtle shifts in wording that might provide hints about when the Fed will begin to reverse some of the extraordinary actions it’s taken, including driving short-term rates to near zero.
Bernanke gave no hints about the timing of the Fed’s “exit strategy.” He repeated the judgment of the FOMC that inflation is likely to remain subdued and warned that inflation rates could even move lower.
“However, as the recovery strengthens, the time will come when it is appropriate to begin withdrawing the unprecedented monetary stimulus that is helping to support economic activity,” Bernanke said. “We are confident that we have all the tools necessary to withdraw monetary stimulus in a timely and effective way.”
Bernanke said the Fed will be able to tighten monetary policy by raising interest rates even before its balance sheet shrinks back to a normal size.
One important tool will be the ability of the Fed to pay interest on the reserves that banks hold at the Fed. If necessary to prevent the economy from overheating, the Fed could raise the rate it pays to banks in order to entice them to deposit excess funds at the Fed, rather than lending them out.
Reserves held at the Fed are effectively quarantined from the economy, and can’t contribute to growth in the money supply or inflation.
By Rex Nutting – MarketWatch.com
Add A Comment