WASHINGTON — The spike in inflation among several developing nations is unlikely to pass through to the United States, Federal Reserve Chairman Ben Bernanke said Wednesday, shrugging off concerns that his unprecedented purchase of U.S. bonds could create longer-term risks.
Testifying before the House Budget Committee, Bernanke fended off numerous questions from the panel's new Republican leaders that implied his policies are creating uncertainty and could foster inflation, a rise of prices throughout the economy. He also warned lawmakers against playing politics with the nation's debt ceiling, which he said must be raised this spring to permit the government to fund its operations.
He repeatedly pushed back against Republican scenarios of galloping inflation that would require painfully high interest rates.
"It's hard to overstate the consequences of getting this wrong," said Rep. Paul Ryan, R-Wis., the new chairman of the House Budget Committee. Ryan suggested that Bernanke was creating risks through a backdoor increase in the money supply, something economists call monetizing debt.
Like a professor lecturing students, Bernanke explained that his efforts were temporary and wouldn't lead to the fearful scenario Ryan painted.
Bernanke said the Fed's ongoing efforts to stimulate the economy by buying U.S. bonds, which began early in the economic crisis with the purchase of mortgage bonds to keep the housing sector afloat, would create about 3 million jobs. He cited research by the Fed's district banks that was corroborated by academic research.
"It could be less or it could be more. But the important thing to understand is that it is significant," the Fed chief said.
Bernanke also urged Congress to deal with reducing the federal budget deficit on a separate track from raising the debt ceiling, which Republicans have threatened to hold hostage until they win deep cuts in spending. He warned that catastrophic consequences could follow any failure to allow the federal government to keep borrowing later this year in order to pay its creditors.
"That's why I am making this case, and hoping that people will take seriously their responsibility to address this problem," he said.
Bernanke pushed back hardest against the idea that U.S. monetary policy somehow is driving up prices in China, Brazil and other emerging markets.
"That's where the demand is," Bernanke said, noting that inflation is rising in the very countries that are experiencing strong growth.
Foreign central banks, not the Fed, must take steps to quash inflation in their own economies, he said.
"Monetary policy can't do anything about, say, for example, bad weather in Russia," Bernanke said, pointing to one factor that's behind rising wheat prices. Some market participants have said the Fed's bond-purchase policy is one of several factors that are driving up global food prices.
China's central bank has raised its benchmark interest rates three times in four months. Latin America's engine of growth, Brazil, is widely expected to raise its interest rate again soon.
Interest rates are central banks' main policy tool to contain inflation, which signals that an economy is overheating. By raising the cost of borrowing, central banks slow economic activity.
Since last August, when the Fed announced its second program of U.S. bond purchases, or "quantitative easing," dubbed QE2, the prices of global commodities such as oil, wheat and corn have been rising. The Fed announced the policy to help spur the weak U.S. economy because its main tool — the benchmark bank-lending rate — has effectively been at zero since December 2008.
Since it can't lower lending rates further, the Fed sought to lower the return on U.S. bonds to force investors out of that haven back into risk taking, such as buying stocks. The Fed's program involves the purchase of $600 billion in U.S. bonds between November 2010 and June 2011.
The policy has raised the values of stocks, bonds and commodities. It's also ended fears of looming deflation, a debilitating collapse in prices across the economy.
However, some analysts think the Fed is overdoing it in purchasing about $100 billion in bonds monthly.
"My objection to QE2 is that it distorts bond markets and is a much bigger role for the Fed in the economy than in the past. Once that dependency begins, it will be hard to go back to a free-market system in the bond market," David Malpass, the president of forecaster Encima Global and a Reagan-era Treasury official, said in a statement that was released during Bernanke's testimony Wednesday.
Bernanke said his policy wasn't distorting markets. As he has in past hearings, Bernanke didn't rule out similar efforts in the future.
"There's a huge lobby on Wall Street for the Fed to buy more bonds. As the end of QE2 approaches, all attention will shift to whether the Fed will extend its buying. This comes at a time when the private sector should be focused on market forces and creating growth and jobs, not speculating on whether the Fed will launch QE3," Malpass said.
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