Bernanke Talks Tough, and Plainly, on Inflation
In his maiden appearance before Congress as Federal Reserve chairman, Ben S. Bernanke signaled that more interest rate increases were likely, a hint that he would follow in the inflation-fighting footsteps of his iconic predecessor, Alan Greenspan.
But he also made it clear that plain-speak would replace the era of Greenspeak.
Delivering the Fed’s semiannual assessment of the economy to the House Financial Services Committee, Bernanke said he foresaw continued strong economic growth, unemployment at or below 5%, moderate inflation and a housing market that cools but doesn’t decline.
“We can actually understand your answers,” Rep. Scott Garrett (R-N.J.) told Bernanke.
“We’re going to miss Mr. Greenspan,” Rep. Maxine Waters (D-Los Angeles) told him. “No one talks like him -- and we don’t want you to.”
The new chairman, in the tradition of the old, declined to say what he would recommend the Fed do with short-term interest rates. Asked directly, he answered: “I can’t comment directly on short-term interest rates.”
Decisions about interest rates, he said, would be “increasingly dependent on incoming data.”
Analysts read such remarks as indicating that at least two, and as many as four, more quarter-point increases in the Fed’s benchmark short-term interest rate were in the offing to stem inflation.
Since mid-2004, the Fed’s policymaking committee has raised the so-called federal funds rate by a quarter of a point at every meeting, from 1% then to 4.5% now. The committee’s next meeting, Bernanke’s first as chairman, is March 28.
With the unemployment rate at 4.7%, well below the top of the Fed’s predicted range, Moody’s Investors Service said, “Prudent investors might plan for a 5.5% fed funds rate.”
“Bernanke is casting himself as a Greenspan clone,” Global Insight, a forecasting firm, said in a note to clients. “Greenspan’s shoes are definitely oversized, but Bernanke is making a convincing case that he is capable of filling them.”
A Republican, Bernanke sought common ground with committee members of all political persuasions. When Rep. Barney Frank (D-Mass.) complained of growing income inequality, Bernanke responded: “I agree with you, congressman, that rising inequality is a concern in the American economy. It’s important for our society that everyone feels that they have an opportunity to participate in the opportunities that the economy’s creating.”
The former Princeton University economics professor won plaudits for distinguishing his answers from Greenspan’s frequently convoluted language. At one point, he explained that long-term interest rates were not rising with short-term rates because inflationary fears had abated and governments around the world were investing their excess dollars in long-term U.S. government securities.
“I can see you’re a former teacher,” Rep. Carolyn B. Maloney (D-N.Y.) said. “You’re very clear in your responses.”
Several times, Bernanke expressed alarm over the size of the federal deficit, which has exceeded $300 billion for three consecutive years and is predicted to do so for two more.
“I believe that it does reduce national savings and therefore imperils, to some extent ... the future prosperity of our country and increases the burden that will be faced by our children and grandchildren,” he said.
But Bernanke refused to be drawn into endorsing any particular strategy for bringing the deficit down, in contrast with Greenspan, who had publicly approved of President Bush’s 2001 tax cuts as a recession-fighting tool.
Rep. Christopher Shays (R-Conn.) asked Bernanke whether the deficit was the product of too little tax revenue or too much government spending. Bernanke said, “Congress at some point needs to decide what the appropriate size of the federal government is. That’s really the first essential question, and it’s a question based on values. And therefore, it really is the elected representatives that have to make that decision.”
It is up to lawmakers who favor low tax rates to find savings on the spending side of the budget, he said. Conversely, those who seek more spending must provide the revenue to pay for it, he said.
At the end of Shays’ questioning, he told Bernanke something that Greenspan had probably never heard: “I just want to thank you for your short answers.”
Bernanke ducked some other budget questions, such as whether Congress should force itself to adopt offsetting tax increases or spending cuts whenever it wants to raise spending or cut taxes.
“I don’t feel it’s appropriate for me to make recommendations to Congress about their procedures,” he said.
But on matters before the Fed, Bernanke pledged to continue the trend toward greater sharing of information with the public.
“I will try to be as open and forthcoming as I can in providing information about the Fed’s strategy and how we see the economy,” he said. “Fresh air is good for the Federal Reserve, and I want to keep moving us in that direction.”