That’s not a typo in the headline. In a recent speech that took some mental gymnastics to absorb, Federal Reserve Chairman Bernanke countered critics of his low rates policy by arguing that a loose monetary policy is the best way to ensure rates can rise to more normal levels.
Why? Because interest rates will naturally move higher once stronger economic growth leads to higher rates of return on investment, Bernanke said. Here’s his argument:
WASHINGTON (Reuters) – Janet Yellen, the Federal Reserve’s influential vice chair, said on Monday the U.S. central bank’s aggressive monetary stimulus is warranted given how far the economy was operating below its full potential.
Downplaying the potential costs of the Fed’s unconventional easing efforts, which currently include $85 billion in monthly asset purchases, Yellen highlighted the dangers of a prolonged period of economic malaise.
Despite the Obama administration’s cataclysmic warnings about the effects of $85 billion in looming spending cuts known as the “sequester,” chances are the lights will not go out when they kick in this weekend. Still, the economic impact could be significant. The cutbacks might shave a half percentage point or more from an economy that is forecast to grow around 2 percent this year — but which only mustered a 0.1 percent increase in annualized fourth quarter GDP. This, at a time when a similar austerity-driven approach has left much of Europe mired in recession.
Both the public and the markets seem to be taking Washington’s latest war of words in stride. After all, people are becoming inured to the regularly scheduled fiscal crises that have become a part of the capital’s landscape. But the sequester’s most frightening potential consequence is much broader than its near-term economic ripples. The real danger is that, with every new episode of political theater over the budget, America’s credibility as a serious, trustworthy nation is eroded. The concept of political risk, once reserved for banana republics in the developing world, is now very much alive in the United States. And that is one liberty a debtor nation cannot afford to take.
WASHINGTON (Reuters) – The U.S. jobless rate is unlikely to reach more normal levels for several years, Federal Reserve Chairman Ben Bernanke said on Wednesday as he again defended the central bank’s forceful easing of monetary policy.
Appearing before a congressional panel for a second straight day, Bernanke downplayed signs of internal divisions at the Fed, saying the policy of quantitative easing, or QE, has the support of a “significant majority” of top central bank officials.
By Pedro Nicolaci da Costa
(Reuters) – U.S. economic growth could surpass expectations this year, but an anemic labor market requires ongoing support from monetary policy, a top Federal Reserve official said on Monday.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, cited strength in sectors such as housing, autos, and energy production and exploration as factors that could push the U.S. economy to grow at a rate beyond his current forecast for a range between 2 percent and 2.5 percent.
Financial markets are again on edge about the direction of Fed policy following the surprisingly hawkish minutes of the January meeting released last week, even if most still expect the central bank to keep buying bonds at the current $85 billion monthly pace at least until the end of the year.
Federal Reserve Board Governor Jeremy Stein, an academic economist who joined the central bank last May, surprised Fed-watchers in his latest speech by focusing entirely on the risks of recent monetary stimulus and saying very little about its benefits. In particular, Stein, a corporate finance expert, raised the possibility that a bubble might be forming in the corporate bond markets, which has seen yields fall to record lows and issuance to record highs.
WASHINGTON (Reuters) – U.S. Federal Reserve officials are likely to press on with their bond-buying stimulus program even though some harbor growing concerns the purchases could fuel an asset bubble or inflation if pushed too far.
A full-throated debate among U.S. central bankers over the wisdom of ongoing quantitative easing, or QE, sent U.S. stock prices down sharply when minutes of the meeting were released on Wednesday.
The Federal Reserve is cognizant of the potential costs of its unconventional policies, but the economic benefits from asset purchases are still far greater than the potential costs, Atlanta Fed President Dennis Lockhart told Reuters in an interview from his offices.
What follows is an edited transcript of the interview.
The December meeting minutes seemed to signal a shift in sentiment at the central bank toward a greater focus on the policy’s costs. How concerned are you about the risks from QE? Has the cost/benefit tradeoff changed for you? What’s your sense of how long you’ll need to keep going?
WASHINGTON, Feb 20 (Reuters) – The weakest U.S. economic
recovery in recent memory could be damaging the country’s
long-term growth potential, according to a number of Federal
Policymakers at the central bank expressed such concerns at
their Jan. 29-30 policy meeting, according to minutes of the
meeting released on Wednesday.
Richard Fisher, the Dallas Fed’s colorfully hawkish president, enjoys touting the remittances that the central bank makes yearly to Treasury, earned, circularly enough, mostly on the returns of the Treasury bonds the Fed holds. Here’s Fisher in September 2010:
All the emergency liquidity facilities that the Federal Reserve instituted were closed down and did not cost the taxpayers of this great country a single dime. Indeed, last year, as we finished up this work, the Federal Reserve paid $47.4 billion in profits to the Treasury. Imagine that! A government agency that (a) created programs that actually worked as promised, (b) made money for the taxpayers in the process and (c) undid the programs – all in the space of about 28 months – once they had done their job.