Bernanke Defends Fed Independence from Short-term Politics

Federal Reserve Board Chairman Ben Bernanke answered congressional calls for audits of the Federal Reserve System with a defense of monetary policy independence from short term political considerations at an NPC Luncheon Feb. 3.

All the Fed's financial transactions are reported and available to congressional agencies, Bernanke told a sold-out luncheon audience. The calls for audits, he said, were calls for political oversight of monetary policy decisions.
Independence is "the fundamental bedrock of central banking," he said, adding that that all members, past and present, of the Federal Reserve Board agreed.
He said that experience elsewhere demonstrates that a politically independent monetary policy leads to better economic outcomes.

The present Federal Reserve policy, which includes $600 billion of long-term asset purchases begun in November, is supporting the economy, he said. He noted both rises in stock market indices and basic economic indicators as evidence.

The chairman cited consumer spending and business investment as signs that a "self sustaining recovery...may be taking hold." He predicted, "a more rapid pace of economic recovery in 2011 than we saw last year."

However, he added that it will be several years before unemployment returns to more normal levels. Meanwhile, despite some rises in commodity prices, overall inflation remains low, he said

The asset purchase program took into account tax cut extensions and other tax policies measures, so their passage does not mean an early end to the program, he said. The purchases inject loanable funds into banks in a way similar to more common monetary policy, he said. He assured the audience that the Federal Reserve monitors the continuing need for the asset purchase program and has the necessary tools to exit from it "at the appropriate time."

Government deficits pose a threat to the economy, he said, citing projections by the Congressional Budget Office that show deficits of over half of GDP by mid-century, an unsustainable situation. He pointed to the aging of the population and rising health costs as the underlying trends feeding the deficit and called for revenue and spending legislation to address it.

The chairman urged congressional action on spending and revenue in lieu of refusing to raise the debt ceiling, which could eventually lead the country to default on its debt interest payments. He termed such a potential event "catastrophic."

-- Lorna Aldrich, [email protected]