MONEY|MARCH 1, 2011, 3:37 P.M. ET
Bernanke: Fed Ready to Tackle Inflation if Necessary
Federal Reserve Chairman Ben Bernanke said Tuesday the U.S. central bank is ready to respond as necessary to a surge in global commodity prices caused in part by unrest in the Middle East, though he said inflation expectations remain low.
Appearing before a Senate panel to deliver his semiannual report on the state of the economy, Mr. Bernanke reiterated that the U.S. economic recovery is gaining traction even as job growth and the housing markets remain weak. The Fed projects U.S. gross domestic product growth in a range of 3.5% to 4% for 2011, Mr. Bernanke said, and there may be reason for optimism on the jobs front in the coming quarters.
Mr. Bernanke, who appears both Tuesday and Wednesday on Capitol Hill to discuss the economy, used his testimony to underscore the Fed's close focus on the politically volatile subject of inflation. While the central bank continues to project low inflation levels for the next several years, he acknowledged the uptick in a number of headline commodity prices since last summer.
While these increases are most likely to result in "at most, a temporary and relatively modest increase" in higher prices for U.S. consumers, Mr. Bernanke made clear the Fed won't hesitate to act if a sustained rise in oil or other materials threaten the economic recovery.
"We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability," Mr. Bernanke said.
He told lawmakers that rising gas prices don't currently pose a significant risk to the economy.
He also played down the role the Fed has had in the surge in global prices, continuing the central bank's offensive against criticisms that its accommodative stance and quantitative easing efforts are contributing to spikes in commodity prices. Noting that unrest in the Middle East has caused oil and gas prices to rise in recent weeks, Mr. Bernanke said it is global demand--particularly from some emerging-market economies--and not U.S. monetary policy that is to blame.
"Commodity prices have risen significantly in terms of all major currencies, suggesting that changes in the foreign-exchange value of the dollar are unlikely to have been an important driver of the increases seen in recent months," he said.
Still, he did say the Fed's various efforts to pump money into the U.S. economy over the past several years appear to have been successful. While some foreign officials have been critical of the Fed's announcement last year of a $600 billion bond-buying plan, known as QE2, Mr. Bernanke said market indicators suggest the economic outlook has improved since its unveiling.
"Of course, it is too early to make any firm judgment about how much of the recent improvement in the outlook can be attributed to monetary policy, but these developments are consistent with it having had a beneficial effect," he said.
In a nod to concerns from some on Capitol Hill about the Fed's exit strategy, Mr. Bernanke also repeated his position that the Fed has a number of tools to tighten monetary policy when appropriate. In response to questions, he said the Fed will be judging in the next few months whether the current economic recovery is self-sustaining enough for the Fed to start to pull back its stimulus efforts without causing any dislocation. Mr. Bernanke said the Fed can't stay "too easy too long" and must act before some economic indicators -- such as full employment -- reach acceptable levels.
Mr. Bernanke elaborated a little bit on what would provoke the Fed to start tightening monetary policy. In short, it won't happen until he is more confident that the recovery can stand on its own, that employment is clearly rising in a sustainable way and that inflation is on its way to stabilizing around 2%. He also said he's well aware of the risk that the Fed will act too slowly and allow inflation to get out of control, something he intends to avoid.
Mr. Bernanke was careful to avoid giving a time table, but the comments seem largely in line with market expectations that the Fed could begin withdrawing money from the financial system and gradually nudge short-term interest rates higher from near zero by early next year.
He said the Fed will continue to review its bond-purchase program and adjust it as needed, and will take other steps to help drain bank reserves at the appropriate time in order to promote a healthy economic situation.
"The FOMC remains unwaveringly committed to price stability and, in particular, to achieving a rate of inflation in the medium term that is consistent with the Federal Reserve's mandate," Mr. Bernanke said.
The central bank chairman was questioned extensively by lawmakers over the U.S. deficit. Mr. Bernanke told the Senate banking committee that the No. 1 problem facing the U.S. economy in the long term is the mounting federal debt and deficit, though he shied away from supporting specific proposals. "It is certainly something that needs to be addressed to get us back on a sustainable path," over the next five to 15 years, he said.
On the U.S. economy, Mr. Bernanke said the Fed sees growing evidence that consumer and business spending may be recovering to a point where growth is self sustaining. He also said foreign and domestic demand has helped bolster gains for U.S. manufacturing.
Despite those positive indicators, he said the U.S. housing market remains "exceptionally weak" and unemployment could take several years to return to more normalized levels.
"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," Mr. Bernanke said.
—Jon Hilsenrath contributed to this article.
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Bernanke: Fed Ready to Tackle Inflation if Necessary
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