Chief of Fed defends stimulus

Bernanke: Low rates still needed

— Ben Bernanke sent a message Tuesday to Congress: The Federal Reserve’s low-interest-rate policies are giving crucial support to an economy still burdened by high unemployment.

The Fed chairman acknowledged the risks of keeping rates low indefinitely. But he expressed confidence that such risks pose little threat now.

Delivering the Fed’s semiannual monetary report to Congress, Bernanke sought to minimize concerns that the central bank’s easy-money policies might cause runawayinflation later or dangerous bubbles in assets such as stocks. He sought to reassure sometimes-skeptical senators that the Fed is monitoring potential threats and can defuse them before they hurt the economy.

Several Fed policymakers said at their most recent meeting that the Fed might have to scale back its bond purchases because of the risks. Those comments, contained in minutes released last week, fanned speculation that the Fed might soon allow long-term borrowing rates to rise.

But Bernanke gave no signal that the Fed might shift away from its low-interest-rate policy. He said its aggressive program to buy $85 billion a month in Treasurys and mortgage bonds had kept borrowing costs low. And that, in turn, has helped strengthen sectors such as housing and autos,he said.

On budget policy, Bernanke urged Congress to replace the automatic spending cuts set to start Friday with more gradual reductions in budget deficits in the short run. He said the Congressional Budget Office estimates that the automatic spending cuts that take effect Friday would shave growth by 0.6 percentage point this year.

“Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said.

Economists said Bernanke made clear the Fed has no plans to scale back its pace of bond purchases.

“That policy will continue to be supportive for growth, with no sign of imminent plans to scale down [the bond purchases] and certainly no plans to remove accommodation for a very long time,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

Shortly before the Fed chairman spoke, several reports pointed to surprising economic strength: Confidence among U.S. consumers jumped more than forecast in February, new-home sales jumped in January to the highest level since 2008, home prices rose at a healthy pace in December compared with a year ago and profits of U.S.banks jumped last quarter to the highest level in six years.

The Conference Board’s consumer confidence index climbed to 69.6 from a downwardly revised 58.4 in January, data from the New York-based private research group showed Tuesday. It was the first improvement in four months and the biggest since November 2011.

The gain in sentiment from the lowest level in more than a year signals Americans are beginning to cope with the a two percentage-point return to the former payroll tax level used to fund Social Security and higher gasoline prices that are curbing disposable income. Rising house values and gains in employment may be brightening attitudes, helping to underpin spending.

“The job market is healing,we’re creating enough jobs to at least keep the unemployment rate stable,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pa. “House prices are rising, and that’s helping to improve confidence.”

Asked about possible threats to the U.S. economy from Europe’s financial crisis, including new fears about Italy, Bernanke said that the exposure of American banks to Italy’s debt was small.

He said a bigger threat could emerge if investors grew worried that the debt crisis might suddenly be worsening. He doesn’t foresee such a threat, Bernanke said.

Information for this article was contributed by Martin Crutsinger of The Associated Press and Jeanna Smialek and Chris Middleton of Bloomberg News.

Business, Pages 28 on 02/27/2013

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