Fed Sees No Reason to Reverse Stimulus

Fed chairman Ben Bernanke is in no rush to scale back his expansionary monetary policy because unemployment remains high.

Ben Bernanke, chairman of the Federal Reserve, and Treasury Secretary Timothy Geithner at a G20 conference in Washington DC, April 15
Ben Bernanke, chairman of the Federal Reserve, and Treasury Secretary Timothy Geithner at a G20 conference in Washington DC, April 15 (IMF/Stephen Jaffe)

Federal Reserve chairman Ben Bernanke signaled on Wednesday that he was in no rush to scale back his bank’s expansionary monetary policy as the labor market remained in a “very, very deep hole.”

During the central bank’s first ever scheduled press conference, Bernanke said that the Fed intends to keep interest rates near zero for “an extended period.” It will also complete its multibillion dollar bond buying program as planned and not let its balance sheet run down immediately thereafter.

In November, the Federal Reserve announced plans to buy some $600 billion worth of United States Treasury securities, effectively injecting hundreds of billions of dollars of “easy money” into the fragile American economy for a second round of quantitative easing.

Since December 2008, the Federal Reserve has financed nearly $2 trillion in government debt. Before the start of the recession, the Fed held no more than $800 billion of Treasury notes on its balance sheet.

The central bank’s expansionary gamble was criticized around the world, from Europe to China to Brazil.

Although the European Central Bank, too, had been buying up bonds from highly indebted European economies, notably Greece, its recommended policy was one of austerity. Across the European Union, countries cut billions in public spending in an effort to regain fiscal balance while the Obama Administration championed the very opposite — a Keynesian stimulus policy that couldn’t prevent unemployment from toppling its set maximum of 8 percent.

While the United States blamed China for artificially keeping the value of their currency low to boost exports, the Chinese saw the Fed’s loose monetary policy as a cloaked method of driving down the exchange rate of the dollar and enhance the competitiveness of American exporters.

Brazil and other emerging economies blamed the Federal Reserve for causing turmoil abroad. By inflating the dollar, the central bank drove up food and fuel prices, hurting millions of poor who spend the bulk of their income on basic commodities.

At home, prices have also soared. Although the official inflation figure has remained fairly stable, it excludes the rising costs of food and energy. In part because oil prices increased as a result of unrest in the Middle East and a decline in domestic oil and gas production, Americans in reality are estimated to pay 8 percent more for necessities than they did four months ago. Rising prices for raw materials and components affect American manufacturers while imports are becoming more expensive.

As the dollar loses value, investors are reaching for gold and silver while billions are flooding emerging markets, amplifying the risk of their economies overheating.

The Fed’s loose monetary policy doesn’t seem to be helping the American economy recover but is undercutting the world’s confidence in the dollar.

According to Bernanke, the economic slowdown since the beginning of the year is “transitory” however. The Fed did revise its growth estimates for 2011 to between 3.1 and 3.3 percent from a January forecast of 3.4 to 3.9 percent.