WASHINGTON -- Federal Reserve Chairman Ben Bernanke defended the central bank's unprecedented asset purchases, saying they are supporting the expansion with little risk of inflation or asset-price bubbles.
"We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery," Mr. Bernanke said Tuesday in testimony to the Senate Banking Committee. "Inflation is currently subdued, and inflation expectations appear well anchored."
Mr. Bernanke used his testimony to push back against colleagues on the Federal Open Market Committee who favor curtailing the $85 billion in monthly bond-buying amid concern about the growth of the Fed's record $3.1 trillion balance sheet. He also differed with senators who said the central bank was engaged in a "currency war" and said he continues to work on ensuring that even the largest financial institutions don't get special status as being too big to fail.
"He pretty much had a checklist of all the new arguments about the efficacy of low rates and risks of QE," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "And he checked them all off: these are not the concerns that you think they are."
Mr. Bernanke faced bipartisan questioning on the central bank's efforts to remove the impression that some banks are too big to fail. Sens. Elizabeth Warren, D-Mass., and David Vitter, R-La., pressed him to do more.
Ms. Warren asked Mr. Bernanke, "We've now understood this problem for nearly five years, so when are we going to get rid of 'too big to fail'?"
Mr. Bernanke said that the Fed is putting "a lot of effort into this" and that "as somebody who has spent a lot of late nights trying to deal with these problems during the crisis, I would very much like to have the confidence that we could close down a large institution without causing damage to the rest of the economy."
Mr. Bernanke also denied that the Fed was engaging in a currency war, a term used to refer to competitive devaluations, through its asset purchase programs. That was in response to Sen. Bob Corker, R-Tenn., who opened his questions by asking "when the Fed decided it was going to stimulate a global currency war as it did, did you -- did you embark on that thinking, well you know, our country's in trouble and let's -- sort of the heck with everybody else?"
Mr. Corker also said that "I don't think there's any question that you would be the biggest dove, if you will, since World War II," using the term for Fed officials who favor easy policy.
Mr. Bernanke responded, "Maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period -- at least one of the best, about 2 percent average inflation."
Mr. Bernanke, 59, cautioned lawmakers that automatic federal budget cuts set to begin Friday will put a "significant" burden on the economy if lawmakers can't avert the reductions. He also urged them to put the budget on a "sustainable long-run path."
A year after first using the term "fiscal cliff" to warn of the cost of immediate spending cuts, Mr. Bernanke returned to Congress with three days remaining to avert $1.2 trillion of across-the-board cuts over nine years that take effect unless lawmakers and President Obama agree on an alternative.
CBO Director Doug Elmendorf told lawmakers at a hearing earlier this month that his nonpartisan agency estimates the cuts would reduce annual gross domestic product growth by 0.6 percentage point this year, enough to eliminate 750,000 jobs.
Citing that estimate, Mr. Bernanke said, "given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run."
Congress agreed to the reductions as part of a deal to increase the U.S. debt limit. The spending cuts would be split almost evenly between defense and non-defense.
The reductions would cost the U.S. hundreds of thousands of jobs and hamper military readiness, Mr. Obama said at a Feb. 19 news conference in which he urged lawmakers to at least approve a temporary package that buys more time for negotiation.
The Fed chief said in his testimony that the FOMC was evaluating the benefit of its policy in creating jobs against potential risks such as complicating their efforts to eventually return their policy to normal, causing financial instability by spurring asset bubbles, and increasing the risk that the Fed loses money on its operations.
Mr. Bernanke said that a "potential cost" of Fed policies that central bankers take "very seriously" is the "possibility that very low interest rates, if maintained for a considerable time, could impair financial stability."
Policymakers have publicly debated the risk of financial instability, with Fed Governor Jeremy Stein saying earlier this month that some credit markets, including leveraged loans and junk bonds, show signs of potentially excessive risk-taking. Kansas City Fed President Esther George has warned of risks from farmland prices at "historically high levels."
Mr. Bernanke said that while the Fed's policy "may increase certain types of risk-taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy."
Mr. Bernanke has held interest rates close to zero since December 2008 and pledged to continue buying bonds until the labor market improves "substantially."
First Published February 27, 2013 5:00 AM