Federal Reserve Chairman Ben S. Bernanke defended the central bank's continued efforts to stimulate the economy, even as he acknowledged a strengthening recovery and gave a slightly more upbeat assessment of the nation's employment situation.
In his first appearance before the House Budget Committee since Republicans took control, Bernanke on Wednesday downplayed the threat of inflation in the U.S., despite sharply higher oil and food prices that have pinched emerging economies such as China's and contributed to the wave of protests in the Middle East.
Bernanke noted that a key inflation measure in the U.S. rose last year at less than half the Fed's 2% target rate. He rejected the notion that the central bank's loose monetary policies were responsible for surging inflation in other parts of the world, as some foreign officials have suggested.
And Bernanke voiced strong confidence that Fed actions to spur growth in the U.S. — by continuing to purchase billions of dollars worth of U.S. Treasury bonds — were temporary measures that policymakers could halt or reverse before inflation got out of hand.
"It is always an issue … that in the recovery period you have to pick the right moment to begin removing accommodation and taking away the punch bowl," Bernanke said, referring to the famous central bank line about the difficulty of raising interest rates when the economy gathers steam because no one wants to stop the party.
"But we are committed to making sure that we do it at the right time," he said.
Even so, there has been increasing concern expressed recently from bond investors, analysts and even within the Fed's own ranks about the central bank's program to buy $600 billion of Treasury bonds through June.
The Fed previously bought about $1.7 trillion in Treasury bonds and other securities to drive down long-term interest rates.
Bernanke, citing what he called "a very careful study" by Fed economists, said the central bank's purchases of bonds and other securities may have saved or created up to 3 million jobs. And the purchases haven't been inflationary, he said, because these funds have been held as reserves with the Fed, not flooded into the economy.
That was cold comfort to some lawmakers.
"My fear is, you're going to catch it before the cow is out of the barn; you're going to see inflation after it has already been launched," said Rep. Paul D. Ryan (R-Wis.), chairman of the House Budget Committee.
Ryan noted, for example, that bond yields in recent days had jumped, which may be an indication of rising expectation of higher inflation down the road. Bernanke said those movements reflected investors' stronger confidence in the economic recovery, not worries about inflation.
Experts said it was probably a little bit of both. "The risk of higher inflation has gone up," said Dean Croushore, chair of the economics department at the University of Richmond, who co-authored a textbook with Bernanke.
"They're in uncharted territory," Croushore said of the central bank's extraordinary measures employed to stimulate the economy. What's more, he added, "inflation often falls at the end of a recession and rises surprisingly quickly at an expansion."
Bernanke is also likely to face more pressure from within if economic growth continues to gather steam. The Fed chairman told lawmakers that "we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold."
Of the job market, Bernanke sounded encouraged by the report last Friday that showed the nation's unemployment rate fell to 9% in January from 9.4% in December and 9.8% in November.
"Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front," he said.
But Bernanke said he still expected economic growth to be moderate for a while. And with employers reportedly remaining reluctant to add to their payrolls, he said, it is likely to be several years before the unemployment rate returns to a more normal rate, which is commonly seen as about 5%.
As he has repeatedly advised in the last year, Bernanke urged lawmakers to address the nation's persistently excessive budget deficits with a long-term perspective in mind.
"We need to show that we have a plan that will carry us forward for the next decade at least, that will produce consistent reductions in that deficit over time," he said.