Bernanke defends Fed, downplays inflation risk

But rising gasoline prices are a threat, he acknowledges

By Jeannine Aversa
Associated Press / February 10, 2011

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WASHINGTON — Members of Congress sharply questioned Federal Reserve chairman Ben Bernanke yesterday over whether the Fed’s policies are raising the risk of higher inflation in the months ahead.

The House Budget Committee’s chairman, Paul Ryan, a Wisconsin Republican, said he is concerned the Fed won’t be able to detect inflation until “the cow is out of the barn’’ and that inflation is already spreading dangerously through the economy.

Bernanke acknowledged inflation is surging in emerging economies. But he downplayed the risks to the US economy, even as lawmakers expressed concern about gasoline and food prices. Inflation in the United States is “quite low,’’ Bernanke said. He blamed higher prices on strong demand from fast-growing countries such as China — not the Fed’s policies to stimulate the economy, including buying $600 billion worth of Treasury debt.

Bernanke’s remarks suggest the Fed will stick with the bond-buying plan through June, as scheduled. The program is aimed at invigorating the economy by lowering rates on loans and boosting prices on stocks.

It was Bernanke’s first appearance before the House since Republicans took control last month. He faced tough questions, despite being a member of the party.

Ryan worries the Fed’s stimulus policies could trigger inflation or fuel speculative buying of stocks or other assets.

The Fed chief said he was confident the Fed has the political will to boost interest rates and snuff out inflationary forces before they take hold.

Bernanke did acknowledge that rising gas prices are a threat to the economy. Prices have been around $3 a gallon nationally. If they were to go above $4 a gallon, that would “take a significant amount of disposable income away from people,’’ he said.

Bernanke said the bond-purchase program is needed to ease high unemployment and credited the Fed’s policies with creating or saving 3 million jobs over the past several years.

The unemployment rate was 9 percent in January after the fastest two-month decline in 53 years. Bernanke cautioned it will take four or five years for hiring to return to normal.

Bernanke again warned Republicans they should not play political games with the Treasury Department’s request to raise the government $14.3 trillion debt ceiling. Republicans have vowed to make deep spending cuts a precondition.

“We do not want to default on our debts,’’ Bernanke said. “It would be very destructive.’’