By Joshua Zumbrun
Dec. 6 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.
“We’re not very far from the level where the economy is not self-sustaining,” Bernanke said in an interview broadcast yesterday by CBS Corp.’s “60 Minutes” program. “It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting.”
Bernanke, in a rare appearance on a nationally broadcast news program, defended the Fed’s efforts to prop up a recovery so weak that only 39,000 jobs were created in November. The unemployment rate last month rose to 9.8 percent, the highest level since April, the Labor Department said on Dec. 3, three days after the Bernanke interview was taped. Republican lawmakers have said the Fed’s policy of “quantitative easing” may do little to help unemployment and may fuel inflation.
“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 percent to 6 percent, Bernanke said. The purchase of more bonds than planned is “certainly possible,” said Bernanke, 56. “It depends on the efficacy of the program” and the outlook for inflation and the economy.
Bernanke said a return to a recession “doesn’t seem likely” because sectors of the economy such as housing can’t become much more depressed. Still, a long period of high unemployment could damage confidence and is “the primary source of risk that we might have another slowdown in the economy.”
Treasuries, Dollar
Treasuries rose, pushing yields down from a four-month high after the remarks were published, with yields on 10-year notes falling 7 basis points to 2.94 percent at 9:11 a.m. in London, according to BGCantor Market Data. The dollar advanced 0.8 percent to $1.3301 per euro.
The Fed’s decision to undertake new bond purchases sparked a political backlash in Washington. The program, known as quantitative easing, has been criticized by officials in countries including China and Germany. Policy makers in emerging markets expressed concern it would drive down the dollar and cause a surge of capital abroad that created asset-price bubbles.
“Bernanke is defending his decisions to a mass American audience” on the CBS program, said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. “He is not giving way to criticism, whether it is domestic or international,” he said, adding that “it’s another reminder that the dollar is a side effect of quantitative easing and not a top factor in the Fed’s view.”
China Criticism
Bernanke in the interview reiterated U.S. complaints that China’s policy of limiting gains in its exchange rate is hurting the U.S. economy.
“Keeping the Chinese currency too low is bad for the American economy because it hurts our trade,” the chairman said in excerpts of the interview posted on the CBS News website. “It’s bad for other emerging market economies. It’s bad for China because among other things it means China can’t have its own independent monetary policy.”
Sarah Palin, the 2008 vice-presidential candidate who has said she’s considering a run for president in 2012, wrote in a Nov. 18 letter to the Wall Street Journal that “It’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems.”
Employment Mandate
Asia’s policy makers would be more likely to impose “soft” capital-control measures should the U.S. expand its bond-purchase program and increase the risk of fund flows into the region, according to Goldman Sachs Group Inc.
“Key policy makers in Asia are on edge,” Michael Buchanan, chief Asia Pacific economist at Goldman Sachs, said in a press briefing in Hong Kong today. Further quantitative easing in the U.S. “would increase the chance of soft capital controls being imposed in many countries around the region,” he said.
Two U.S. Republicans, Tennessee Senator Bob Corker and Indiana Representative Mike Pence, last month proposed removing the Fed’s maximum employment mandate to focus the central bank on stable prices alone. Corker plans to introduce such legislation next year.
‘Overstated’ Fears
Bernanke said fears of inflation are “overstated” and that keeping inflation under control isn’t a diminished priority for the Fed.
The rate of inflation has slowed this year, with the personal consumption expenditures index, excluding food and energy, rising at a 0.9 percent annual pace in October, the slowest in 50 years. Including all items, the index increased 1.3 percent.
Without action by the central bank, the economy might have tipped into a period of deflation, or a prolonged drop in prices, Bernanke said.
“Because the Fed is acting, I would say the risk is pretty low” of deflation, Bernanke said. “But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.”
Bernanke said he is “100 percent” confident that, when necessary, the central bank can control inflation and reverse its accommodative monetary policy.
Targeting Inflation
“We’ve been very, very clear that we will not allow inflation to rise above 2 percent,” he said.
“We could raise interest rates in 15 minutes if we have to,” he said. “So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.”
“That time is not now,” he said.
The Fed’s policy of purchasing Treasury securities shouldn’t be considered simply printing money, Bernanke said.
“The amount of currency in circulation is not changing,” he said. “The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.”
The Fed has increased its balance sheet by expanding excess reserves at banks. The Fed reports two measures of the money supply. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M1 has risen 6.9 percent in the past year, compared to a 4.3 percent average increase since 2000, the Fed said last week.
Policy ‘Trick’
“By lowering interest rates, we hope to stimulate the economy to grow faster,” Bernanke said. “The trick is to find the appropriate moment when to begin to unwind this policy.”
Longer-term interest rates, which had been falling since April as the economy slowed and speculation increased that the Fed would have to do more, have risen since the Fed’s Nov. 3 announcement of the bond purchases.
The yield on the 10-year Treasury note has increased 44 basis points since Nov. 3 to 3.01 percent on Dec. 3, while the 30-year Treasury yield has risen 27 basis points to 4.31 percent. A basis point is 0.01 percentage point.
Bernanke gave his first televised interview as Fed chief on “60 Minutes” on March 15, 2009, near the lowest point for the stock market in more than a decade. He said then that “green shoots” were beginning to appear in financial markets. On March 9 of that year, the Standard & Poor’s 500 closed at 676.53, the lowest level since 1996.
Communication Policy
Bernanke’s interview comes as Fed officials are undertaking their broadest review of public communications in three years. Janet Yellen, the Fed’s vice chairman, is chairing a subcommittee to ensure the public is “well informed about monetary policy issues.”
Yesterday’s “60 Minutes” interview was taped in Columbus, Ohio, during a visit in which Bernanke joined in a panel discussion at the Ohio State University campus with business leaders, including Alan Mulally, president and chief executive officer of Ford Motor Co. The gathering was part of a series of public appearances and question-and-answer sessions by Bernanke this year.
Bernanke appeared in a June question-and-answer session with Sam Donaldson, the ABC News journalist, in Washington. In May 2010, Bernanke toured a Philadelphia shipyard and a Tasty Baking Co. factory in a part of the city that is being redeveloped. Bernanke also answered questions from college students in Providence, Rhode Island, in October and in Jacksonville, Florida, in November.
“This is just another way to try to get our messages out and try to talk effectively about monetary policy,” St. Louis Fed President James Bullard said in a Dec. 3 interview on C-Span television’s “Newsmakers” program broadcast yesterday.
“Since we’re in such an unusual situation, it looks like we’re going to be here for a while, we probably need to think about ways to more effectively communicate,” Bullard said.
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