Inflation Risk Is Low, Fed Says

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The Wall Street Journal
By: Sudeep Reddy
December 5, 2010

Federal Reserve Chairman Ben Bernanke took his message into American homes Sunday evening, defending the central bank's bond-buying program and pledging his "100%" confidence he could prevent runaway inflation.

In a rare television interview, on CBS's "60 Minutes" news program, Mr. Bernanke warned that the economic recovery "may not be" self-sustaining. He said the chance of unemployment staying high for a protracted period was "the primary source of risk that we might have another slowdown in the economy."

He also said "it's certainly possible" the Fed could expand a program to buy $600 billion in Treasury securities beyond the initial target it announced about a month ago. "It depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks," he said of the program aimed at lowering interest rates and stimulating growth.

This was the Fed chairman's second appearance on "60 Minutes." In a March 2009 interview, he defended the central bank's response to the financial crisis amid the backlash over bailing out insurer American International Group Inc. Since the crisis began, Mr. Bernanke has taken his message to the public through town hall forums and discussions on college campuses.

The bond-buying announcement drew sharp attacks from foreign leaders, who feared damage to their export sectors, along with conservative economists and politicians who said it would spur runaway inflation.

Mr. Bernanke called the inflation fears "way overstated" and said he had 100% confidence he could act quickly enough to keep prices in check. "We've been very, very clear that we will not allow inflation to rise above 2% or less," he said. "We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time."

Mr. Bernanke said the Fed decided to embark on its bond-buying plan because of high unemployment and "very, very low" inflation that put the economy at risk of deflation.

"We're getting awfully close to the range where prices would actually start falling," he said. By acting, "the risk is pretty low. But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern."

People who worry about inflation are "looking at some of the risks and uncertainties with doing this policy action, but what I think they're not doing is looking at the risk of not acting," Mr. Bernanke said.

Mr. Bernanke also said "it doesn't seem likely" that the economy would fall into recession again but suggested that could happen if the unemployment rate remained high "for a protracted period of time." The Fed chairman said returning to a more normal unemployment rate of 5% or 6% could take four or five years. Some economists say that assessment is optimistic.

As lawmakers in Washington debate extending tax cuts and cutting the deficit, Mr. Bernanke said policymakers should focus on the long-term structural budget deficit but not take actions "that will affect this year's spending and this year's taxes in a way that will hurt the recovery." He also endorsed efforts to overhaul the tax code to increase its efficiency and create more incentives for investment.

Mr. Bernanke called the growing income gap between rich and poor Americans "a very bad development" that's based in large part on education. "It's creating two societies," he said. "If you're a college graduate, unemployment is 5%,'' he said.

"If you're a high school graduate, it's 10% or more. It's a very big difference. It leads to an unequal society and a society which doesn't have the cohesion...that we'd like to see."

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This page contains a single entry by CFED published on December 6, 2010 4:34 PM.

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