WASHINGTON – Chairman Ben Bernanke offered a wide-ranging defence Monday of the Federal Reserve’s aggressive policies to stimulate the still-weak economy.
The Fed needs to drive down long-term borrowing rates because the economy isn’t growing fast enough to reduce high unemployment, Bernanke said in a speech to the Economic Club of Indiana. The U.S. unemployment rate is 8.1 per cent.
Low rates could also help shrink the federal budget deficit by easing the government’s borrowing costs and generating tax revenue from stronger growth, Bernanke argued.
The chairman cautioned Congress against adopting a law that would allow it to monitor the Fed’s interest-rate discussions. The House has passed legislation to broaden Congress’ investigative authority over the Fed — authority that would include a review of interest-rate policymaking. The Senate hasn’t adopted the bill.
Bernanke warned that such a step would improperly inject political pressure into the Fed’s private deliberations and affect the officials’ decisions.
His speech follows the Fed’s decision at its Sept. 12-13 meeting to launch a new mortgage-bond buying program. The goal is to try to drive low mortgage rates even lower to encourage home buying. Increased home sales could help spur hiring and accelerate economic growth.
The average rate on a 30-year fixed-rate mortgage is already 3.4 per cent, a record low. But some economists think home loan rates could fall further, in part because long-term Treasury yields are much lower: The rate on the 10-year Treasury is just 1.62 per cent.
After its September meeting, the Fed said it would keep buying mortgage bonds until the job market showed substantial improvement. It also decided to keep its benchmark short-term rate near zero through at least mid-2015.
In his speech Monday, Bernanke sought to reassure investors that the Fed’s timetable for keeping its short-term rate ultra-low “doesn’t mean we expect the economy to be weak through 2015.” Rather, he said the Fed expects to keep rates low well after the economy strengthens.
Bernanke spoke two days before President Barack Obama and Republican challenger Mitt Romney will hold a debate in which the economy is the central theme. And on Friday, the government will release its September jobs report. Economists expect only modest hiring and continued unemployment above 8 per cent.
The U.S. economy is still struggling more than three years after the Great Recession ended. Persistently high unemployment and weak pay growth have kept spending by consumers weak. That, in turn, has hurt manufacturing and slowed broader economic growth.
The Fed’s latest round of bond buying and its plan to keep rates super-low into 2015 will likely provide only modest help, said David Jones, chief economist at DMJ Advisors.
“The Fed is at the tail end of a long series of actions,” Jones said. “They have reached a point of diminishing returns.”
Bernanke himself made clear Monday, as he has in the past, that the Fed’s low-rate policies are no panacea for the economy.
“Many other steps could be taken to strengthen our economy over time, such as putting the federal budget on a sustainable path, reforming the tax code, improving our educational system, supporting technological innovation and expanding international trade,” he said.
Still, the Fed chairman reiterated his argument that lower rates boost growth by helping increase prices of stocks, homes and other assets. Greater household wealth tends to make consumers and businesses more willing to spend.
Bernanke noted that when the Fed launched its first round of bond buying in late 2008, the average rate on a 30-year fixed-rate mortgage was a little above 6 per cent. Today, the rate is 3.4 per cent, the lowest since long-term mortgages began in the 1950s.
Still, the housing market’s recovery remains slow, in part because many Americans lack the credit to qualify for a mortgage or can’t afford the larger down payments now required.
Responding to a question after his speech, Bernanke said he disagreed with a minority of analysts who fear another recession is nearing. But he said the economy is growing at an annual rate of only between 1.5 per cent and 2 per cent — too slow to lower unemployment much.
The Fed’s decision last month to launch a new mortgage-buying program was approved by its policy committee, 11-1. Jeffrey Lacker, head of the Federal Reserve Bank of Richmond, cast the lone dissenting vote. Lacker has argued that further bond buying won’t likely provide much economic help and risks igniting inflation in the future.
Charles Plosser, president of the Fed’s Philadelphia regional bank, and Richard Fisher, president of the Fed’s Dallas regional bank, have also been critical of the Fed’s bond purchases. Plosser and Fisher do not have votes on the Fed’s policy committee this year but take part in the discussions.
At the same time, one Fed official who had been skeptical of the bond buying now appears more open to it. Narayana Kocherlakota, president of the Minneapolis Fed, has signalled that he’s grown more concerned about the economy’s sluggish growth. In a speech a week after last month’s policy meeting, Kocherlakota said the Fed should fight high unemployment with an even more aggressive approach than it announced.
Still, like Plosser and Fisher, Kocherlakota lacks a vote on the Fed’s policy committee this year.
AP Business Writer Tom Murphy in Indianapolis contributed to this report.