McClatchy Washington Bureau

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WASHINGTON — The Federal Reserve's latest effort to boost the economy through its holdings of government bonds is meaningful but will have only a modest effect, especially in light of ongoing global financial turmoil, Chairman Ben Bernanke cautioned Tuesday.

Bernanke testified before the Congress Joint Economic Committee, providing a grim assessment of the U.S. economic recovery and fending off criticism from fellow Republicans.

Many GOP lawmakers are uneasy with the Fed’s aggressive campaign to force risk taking in the economy by lowering the return for investing in the haven of U.S. government bonds. The latest effort to do this has been dubbed Operation Twist, where the Fed looks to exchange about $400 billion in short-term bonds it holds for long-term bonds. The hope is that it will bring down long-term lending rates, sparking more car loans, mortgages and mortgage refinancing.

The Fed chief called Operation Twist “meaningful” and designed to give another forward shove to an economy that's at risk of sliding back into recession. He expected Operation Twist to reduce long-term interest rates only modestly, by about two-tenths of a percentage point.

In response to bipartisan concerns about China’s policy of artificially fixing its currency, the yuan, to the dollar at a rate that gives Chinese products an advantage, Bernanke gave lawmakers the answer they wanted.

“It’s certainly a negative,” Bernanke said, adding later that China’s policy has created inflation problems for Chinese consumers and had a “negative influence” on the U.S. and global recovery. On trade and investment barriers within China, the Fed chief said, “I think continued pressure and discussion with them about these trade barriers … is very important, very constructive.”

The China comments are important because they could boost a bipartisan bill that's expected to pass the Senate later this week. The legislation, which big business groups oppose, would brand China a currency manipulator, thus enabling U.S. manufacturers to seek redress through trade penalties.

Tuesday’s hearing also was notable for what wasn’t said.

Not a single Democrat voiced support for President Barack Obama’s recently proposed jobs plan, the one he's repeatedly implored Congress to pass. It wasn’t until the 93rd minute of the hearing that a Democrat cited only a portion of the plan _ extending payroll-tax holidays _ and that was just a passing mention.

Bernanke repeated prior testimony that Congress can and should take immediate steps to stimulate the economy. Pushing back on GOP insistence on deep spending cuts, Bernanke said stimulus could be done simultaneously with a plan to get U.S. debt and deficits under control over the medium term.

In the hearing’s oddest moment, Rep. Mick Mulvaney, R-S.C., blamed Bernanke’s low interest-rate policies for the inability of Congress to stop spending.

“I would suggest to you that the Fed is part of the difficulty,” he said, adding that the Fed’s decision to keep interest rates near zero since December 2008 is “making it easier for us to continue doing what we are doing.”

Bernanke pushed back.

“I don’t think that’s a valid point,” he said, noting tersely that his actions didn’t “eliminate the responsibility of Congress to take its own action.” The Fed chief, as if talking to a young student, explained that, “We need to keep interest rates low to provide support for the economy.”

Appointed by President George W. Bush and formerly the head of his Council of Economic Advisers, Bernanke took lots of heat from GOP lawmakers.

The ranking Republican on the joint committee, Texas Rep. Kevin Brady, accused the Fed of insufficient transparency. That theme was echoed by Utah Republican Sen. Mike Lee, prompting Bernanke to suggest it was “urban legend” that the Fed isn't thoroughly audited.

Republican Sen. Jim DeMint of South Carolina accused Bernanke, a fellow South Carolinian, of overstepping his authority.

“You in effect have become an economic player in the private-sector economy much beyond banking,” DeMint said.

Rep. Michael Burgess, R- Texas, all but taunted Bernanke, suggesting that the Fed was out of tricks to help the recovery.

“Do you have other arrows in your quiver at this point … is the only arrow you have left the printing press?” he asked.

That struck a nerve, and Bernanke shot back, “I think that’s a rather unfair characterization.”

The Fed isn't printing money and Operation Twist doesn't add to holdings by the Fed but simply rebalances them, he said.

Only toward the end of the hearing did lawmakers ask the nation’s top banker what further steps could be taken to boost an economy that's flirting with a double-dip recession.

Bernanke suggested that a tax overhaul would be a plus, and that lawmakers could take steps to make it easier for banks to convert foreclosed properties into rental units. He also suggested that banks could help matters by forgiving portions of loans when they greatly exceed the current values of given homes.

“I am not aware of any fundamental reason why a bank could not do that on its own loan,” he told California Republican Rep. John Campbell.

Much of the hearing focused on Europe’s widening debt crisis.

“I do have concerns about the European situation,” Bernanke confided. Europe needs to be more aggressive in addressing the problems of Greek, Irish and Portuguese debt, he said, and the insufficient response to date already has harmed the United States.

“I believe one of the reasons the recovery has been slower … is because we’ve faced a lot of financial volatility,” the Fed chief said.

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