WASHINGTON – 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 runaway inflation later or dangerous bubbles in assets like 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. Stock prices fell sharply.
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 due to start Friday with more gradual reductions in budget deficits in the short run. He noted that the Congressional Budget Office estimates that the automatic spending cuts that take effect Friday would shave growth by a 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.