Bernanke, in Europe, defends Fed’s latest effort to stimulate U.S. economy

Federal Reserve Chairman Ben S. Bernanke defended the Fed’s controversial actions to stimulate the U.S. economy, saying central banks worldwide need to be “creative and innovative” in responding to economic crises.

Bernanke, facing perhaps the sharpest criticism of his tenure, delivered a scholarly but pointed address Friday in Europe, where some skeptical nations have joined China and U.S. critics in questioning the Fed’s plan to pump $600 billion into the domestic economy.

“On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” Bernanke said. “As a society, we should find that outcome unacceptable.”

His comments at a European Central Bank conference in Frankfurt, Germany, capped a week of public campaigning by Fed officials as they defended their latest effort to shore up the economy.

Bernanke’s allies on the Fed fanned out across the nation this week to justify their plan as a necessary and appropriate stimulus for the sagging U.S. economic recovery. The unusual blitz of speeches came as the Fed has been under increasing fire at home and abroad.

Domestic critics, including “tea party” favorite Sarah Palin, contended that the Fed risks a jump in prices for food, energy and other goods at a time when U.S. households already are struggling.

Some Republicans in Congress said this week they wanted to remove the Fed’s mandate to promote full employment, leaving the central bank to focus solely on keeping inflation and interest rates stable.

Some foreign governments, including Germany, China and Brazil, complained that the Fed’s bond-buying program would give U.S. exporters an economic advantage by driving down the value of the dollar.

In Frankfurt, one of the centers of international opposition, Bernanke issued a strong defense, arguing in two speeches that central banks need to be bold in responding to the lingering effects of the financial crisis.

“During the crisis, central banks were creative and innovative, developing programs that played a significant role in easing financial stress and supporting economic activity,” Bernanke said at the conference.

“As the global financial system and national economies become increasingly complex and interdependent, novel policy challenges will continue to require innovative policy responses,” he said.

The Fed took one of those steps Nov. 3. In a move known as quantitative easing, it decided to buy $600 billion in U.S. Treasury bonds over eight months to push down long-term interest rates and thus encourage consumers and businesses to spend and borrow more.

But there was dissent within the Fed over the move. Some members, such as Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, worried that the purchases would run the risk of fueling inflation and lowering the value of the dollar.

The plan triggered complaints that the central bank was pushing the envelope too far on monetary policy.

Even Former Fed Chairman Alan Greenspan accused the U.S. of “pursuing a policy of currency weakening.”

Treasury Secretary Timothy F. Geithner and President Obama rallied behind the Fed. But that might have fueled more criticism, said Vincent Reinhart, a former Fed official now with the conservative American Enterprise Institute think tank in Washington.

“The fact that the president and the secretary had to defend the Fed brought it into the political arena, and now it’s being criticized by a lot of politicians,” he said. “The Fed is trying to address the international and domestic criticism.”

Palin urged Bernanke to “cease and desist” from the plan, warning it would drive up prices for consumers. And Republican congressional leaders, including incoming House Speaker John A. Boehner of Ohio, wrote to Bernanke this week warning of negative implications that “could cause further economic disruptions.”

Geithner fired back in an interview on Bloomberg Television on Friday, saying “it is very important to keep politics out of monetary policy.”

Also rallying to the defense, Eric Rosengren, president of the Federal Reserve Bank of Boston, unveiled research saying the Fed’s plan would result in 700,000 more jobs by the end of 2012. And Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said the bond purchases wouldn’t be “kindling for some future inflationary fire.”

In Frankfurt, Bernanke appeared to take aim at critics who wanted to remove the Fed’s mandate to keep unemployment low. He stressed that “persistently high unemployment, through its adverse effects on household income and confidence, could threaten the strength and sustainability of the recovery.”

He sought to downplay concerns by noting that inflation remains low and reiterating the Fed’s promise that it would monitor its asset purchases regularly and “would adjust the program as needed.”

“The two-speed nature of the global recovery implies that different policy stances are appropriate for different groups of countries,” he said.

Bernanke also criticized China and some other emerging-market countries for manipulating their currencies. He said such moves had helped create “large and persistent” trade imbalances that pose “a growing financial and economic risk.”

The Fed’s bond-buying plan has risks, Reinhart said, but the central bank has been forced to try to boost the economy because Congress and the White House can’t agree on what to do.

“On a list of 15 things to do in Washington to help recovery and sustain expansion, [quantitative easing] is probably No. 15,” he said. “The problem is 1 through 14 seem almost impossible because of political gridlock.”

But that gridlock has put the spotlight on the Fed. Reinhart said Bernanke and the Fed have to defend themselves, but that might not end the debate.

“This being Washington, D.C., once you start going out in the public defending what you’re doing, it more often than not generates more criticism,” Reinhart said. “But the Fed has to make its case.”

jim.puzzanghera@latimes.com