Fed defends its stimulus actions

WASHINGTON — Federal Reserve Chairman Ben Bernanke on Wednesday defended the central bank's continued efforts to stimulate the economy, even as he acknowledged a strengthening recovery and gave a slightly more upbeat assessment of the nation's employment situation.

In his first appearance before the House Budget Committee since Republicans took control, Bernanke downplayed the threat of inflation in the U.S. —despite sharply higher oil and food prices that have pinched emerging economies such as China and contributed to the wave of protests in the Middle East.

Bernanke noted that a key inflation measure in the U.S. rose last year at less than half the Fed's 2 percent target rate. He denied that the central bank's monetary policies were responsible for surging inflation in other parts of the world, as some foreign officials have suggested.

And Bernanke voiced strong confidence that Fed actions to spur growth in the U.S. —by continuing to purchase billions of dollars of U.S. Treasury bonds — were temporary measures that policymakers could halt or reverse before inflation got out of hand.

"It is always an issue... that in the recovery period you have to pick the right moment to begin removing accommodation and taking away the punch bowl," Bernanke said, referring to the famous central bank line about the difficulty of raising interest rates when the economy gathers steam because no one wants to stop the party.

"But we are committed to making sure that we do it at the right time," he said.

Even so, there has been increasing concern expressed recently from bond investors, analysts and even within the Fed's own ranks about the central bank's latest program to buy $600 billion of Treasury bonds through June.

The Fed previously bought some $1.7 trillion of Treasury and other securities to drive down long-term interest rates.

Bernanke, citing what he called "a very careful study" by Fed economists, said that the central bank's purchases of bonds and other securities may have saved or created up to 3 million jobs. And they haven't been inflationary, he said, because these funds have been held as reserves with the Fed, not flooded into the economy.

That was cold comfort to some lawmakers.

"My fear is... you're going to see inflation after it has already been launched," said Rep. Paul Ryan, R-Wis., the new chairman of the House Budget Committee.

Ryan noted, for example, that bond yields in recent days had jumped, which may be an indication of rising expectation of higher inflation down the road. Bernanke said that those movements reflected investors' stronger confidence in the economic recovery, not worries about inflation.

Experts say it's probably a little bit of both. At any rate, "the risk of higher inflation has gone up," said Dean Croushore, chair of the economics department at the University of Richmond who co-authored a textbook with Bernanke.

"They're in uncharted territory," Croushore said of the central bank's extraordinary measures employed to fight the deep recession. What's more, he added, "inflation often falls at the end of a recession and rises surprisingly quickly at an expansion."

Bernanke is also likely to face more pressure from within if economic growth continues to gather steam. The Fed chairman told lawmakers Wednesday that "we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold."

Of the job market, he sounded encouraged by Friday's report showing the nation's unemployment rate falling to 9 percent last month from 9.4 percent in December and 9.8 percent in November.

"Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front," he said.