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G.O.P. Says Fed Action Could Hurt Economy

Binyamin Appelbaum|The New York Times
Thursday, 19 Jul 2012 | 4:03 AM ET

House Republicans pressed the Federal Reserve chairman, Ben S. Bernanke, on Wednesday to forswear additional actions to stimulate growth, warning that the results would be counterproductive.

Federal Reserve Bank Chairman Ben Bernanke
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Federal Reserve Bank Chairman Ben Bernanke

Mr. Bernanke avoided commitments during two days of Congressional testimony, but he told a Senate committee on Tuesday that the Fed was prepared to expand its efforts if it concluded that job growth had stalled.

Republicans on the House Financial Services Committee, which hosted Mr. Bernanke on Wednesday, wasted little time in responding.

They questioned whether the Fed’s existing efforts were bolstering growth and suggested any benefits had been exhausted. They fretted that the Fed was seeding higher inflation and postponing a necessary reckoning with the federal debt.

“The truth is the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president,” said the committee chairman, Representative Spencer Bachus, Republican of Alabama.


Democrats made no countervailing effort to convince Mr. Bernanke that he should take additional action, instead congratulating the Fed chairman in the manner of people confident that they were speaking to an ally.

“I want to thank you for your steadfast commitment to taking action as you deem appropriate,” said Representative Michael E. Capuano, Democrat of Massachusetts.


Said Representative Al Green, Democrat of Texas, “I would like to yield most of my time to you” to speak about the Fed’s successes.

Representative John Carney, Democrat of Delaware, asked, “The Fed is doing everything it can to address the unemployment part of your mandate, is that correct?”

Mr. Bernanke paused a moment before responding that the Fed “certainly” could do more, and was considering whether it should.

“We are very committed to ensuring, or at least doing all we can to ensure, that we continue to make progress on unemployment,” he said earlier in the hearing.

What Could The Fed Do?

The three hours of testimony provided little clarity about what the Fed’s policy-making committee would do at its next scheduled meeting July 31 and Aug. 1. Mr. Bernanke said Tuesday that the Fed remained uncertain about the economy, which appears to be growing slowly — recovering from crisis, but not at a rapid enough pace to reduce persistent unemployment.

The Fed’s beige book survey of regional business conditions, published Wednesday, reported “modest to moderate” growth in late June and early July. The regional reports were weaker in aggregate than the last report in early June.

While the Fed has responded vigorously to any sign that the economy is slipping back toward recession, it has hesitated to address the current malaise.


Sandra Pianalto, the president of the Federal Reserve Bank of Cleveland, noted Tuesday that taking additional action carried significant risks, including the possibility that the Fed could disrupt the function of financial markets by soaking up too large a share of Treasury securities or other financial assets.

She also noted the Fed’s limited power. “Monetary policy cannot directly control the unemployment rate; it can only foster conditions in financial markets that are conducive to growth and a lower unemployment rate,” she said.

Republicans embroidered this theme on Wednesday.

Noting that “we have seen the greatest monetary stimulus in the history of our country,” and that the economy was still just muddling along, Representative Jeb Hensarling, Republican of Texas, asked Mr. Bernanke why he believed that additional measures would produce better results.

“There are limits to what monetary policy can achieve,” Mr. Hensarling said.

Mr. Bernanke responded that monetary policy “is not a panacea,” but he said that the Fed had succeeded in reducing borrowing costs, and that he was confident that the Fed retained the power to further reduce interest rates.

Mr. Bernanke did rule out one form of new action, the idea that the Fed could bolster growth by temporarily encouraging a higher rate of inflation.

Under questioning by Representative Patrick McHenry, Republican of North Carolina, Mr. Bernanke offered about as clear a rejection of such a policy as is ever heard from a central banker.

“I don’t think, first, that we could do that without losing control of the inflation process,” Mr. Bernanke said.

“Secondly,” he continued, “I’m very skeptical that it would increase confidence among businesses and households and increase economic activity. I think it would create a lot of problems in financial markets as well.”

“And so,” he concluded, “I don’t think that’s a strategy that has a lot of support on the Federal Open Market Committee.”

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