Bernanke-Led Economy Shows Critics Wrong About Fed
More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texaswarned that the Fed’s second round of asset purchases risked asharp acceleration in prices, the surge has failed tomaterialize. The personal-consumption-expenditures price indexrose 2.4 percent for the 12 months ending in December, near thecentral bank’s 2 percent target.
“The statements were politically motivated,” said John Lonski, chief economist at Moody’s Capital Markets Group in NewYork. With unemployment stalled above 8 percent for three years,“I don’t see how anybody in their right mind could form astrong argument for persistent, rapid inflation in the UnitedStates without the participation of the labor market.”
Even though the economy is showing signs of strengtheningand inflation appears in check, Republicans Mitt Romney and Newt Gingrich, who also are running for president, have said theywouldn’t keep Bernanke, 58, when his second four-year term asFed chairman expires on Jan. 31, 2014. Gingrich said inSeptember that Bernanke was “the most inflationary, dangerousand power-centered chairman” in the central bank’s history.
“The criticism about the Fed being inflationary is notfact-based,” said Mark Gertler, an economics professor at NewYork University who has co-written research with Bernanke. “Interms of an inflation record, the facts are the Fed has been asclose to impeccable as you can possibly get.”
During Bernanke’s tenure, the U.S. consumer price index hasrisen an average of 2.4 percent, lower than the 3.1 percentaverage for Alan Greenspan and 6.3 percent for Paul Volcker.Greenspan was chairman from 1987 to 2006; Volcker was Fed chieffrom 1979 to 1987.
Sacrifice Inflation Goal
Bernanke last week defended his commitment to pricestability before Congress in Washington, rejecting suggestionsthat he would sacrifice his inflation goal to boost employment.“Over a period of time, we want to move inflation alwaysback toward 2 percent,” Bernanke said Feb. 2 in response toquestioning from Republican Representative Paul Ryan ofWisconsin, chairman of the House Budget Committee. “We’realways trying to bring inflation back to the target.”
Bond traders predict the Fed will come close to achievingthat goal. The break-even rate for five-year Treasury InflationProtected Securities, the yield difference between theinflation-linked debt and comparable-maturity Treasuries, was1.91 percentage points yesterday. The rate, a measure of theoutlook for consumer prices over the life of the securities, hasfallen from 2.47 points on April 29 as commodity prices havedeclined.
Inflation ‘Misinformation’
“There’s been an extraordinary amount of misinformationabout inflation circulating,” Gertler said. “We have not hadany sign of sustained inflation.”In January, Fed officials lowered their projections forprice acceleration, with inflation ranging from 1.4 percent to1.8 percent this year, and 1.4 percent to 2 percent in 2013. InNovember, they predicted inflation of 1.4 percent to 2 percentin 2012, and 1.5 percent to 2 percent next year.
Bernanke deflected a question from a reporter at his Jan.25 press conference about whether he’d resign if a Republicanwere elected president in November and asked him to do so.
“I’m not going to get involved in political rhetoric,”Bernanke said. “As long as I’m here, I will do everything I canto help the Federal Reserve achieve its dual mandate of pricestability and maximum employment.”
Exit Tools
The test on inflation will come when the central bank mustwithdraw its record stimulus, said Peter Hooper, chief economistat Deutsche Bank Securities Inc. in New York. The policy-settingFederal Open Market Committee said last month it plans to keepits benchmark interest rate “exceptionally low” until at leastlate 2014. Hooper said Bernanke has the tools to containinflation when it comes time to exit.“If it looks like the economy is going to overheat, theFed has a tremendous amount of ammunition,” such as sellingassets or raising the interest rate on excess reserves, Hoopersaid. “Right now the emphasis is on, ‘Hey, the economy is stillweak. Let’s focus on getting that back to the norm.’”
The Fed has taken unprecedented measures to spur growth inthe aftermath of the worst recession since the Great Depression,leaving the federal funds rate banks pay each other on overnightloans near zero since December 2008 and buying $2.3 trillion ofbonds in two programs of so-called quantitative easing.
Harshest Political Backlash
The second round of asset purchases, which ran fromNovember 2010 through June 2011 and was dubbed QE2 by analystsand traders, sparked the harshest political backlash against theU.S. central bank in three decades. 2008 Republican vice-presidential candidate Sarah Palin called it a “dangerousexperiment” in November 2010, saying it wouldn’t “magicallyfix economic problems.”In September of last year, the FOMC voted to replace $400billion of short-term debt in its portfolio with longer-termTreasuries in an effort to further lower borrowing costs. Theyield on the benchmark 10-year Treasury note was 1.97 percentyesterday, down from 2.13 percent on Sept. 1.
This move and QE2 help “to explain why some of the recentnews on U.S. economic activity has been better thananticipated,” Lonski said.
The unemployment rate fell to 8.3 percent in January, thelowest since February 2009, according to a Labor Departmentreport last week. Payrolls rose by 243,000, exceeding the mostoptimistic forecast in a Bloomberg News survey. The U.S. economyis forecast to grow at a 2.3 percent rate this year, up from 1.7percent in 2011, according to a Bloomberg News survey of 70economists last month.
Under Control
Meanwhile, prices appear under control, according toDeutsche Bank’s Hooper. So-called core inflation, stripped ofenergy and food costs, climbed 1.8 percent in the 12 monthsending in December, the personal-consumption-expenditures priceindex shows.“It just doesn’t look like there’s any evidence rightnow” of an inflation surge, Hooper said. “There are no alarmbells going off in terms of the current picture.”
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