Bernanke downplays cost of economic stimulus

12:24 PM, Jan 16, 2014   |    comments
WASHINGTON, DC - JANUARY 16: Federal Reserve Board Chairman Ben Bernanke speaks during a session at the Brookings Institution January 16, 2014 in Washington, DC. Bernanke spoke on 'Central Banking after the Great Recession: Lessons Learned and Challenges Ahead.' (Photo by Alex Wong/Getty Images)
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USA TODAY - Outgoing Federal Reserve Chairman Ben Bernanke on Thursday dismissed concerns that the central bank's extraordinary stimulus program is exacting a growing toll on the economy, such as raising the risk of eventual inflation.

"Some of the costs people talk about are not really costs," Bernanke said in an interview with author and former banking industry official Liaquat Ahamed at the Brookings Institution.

Bernanke, who helped lead the nation from the financial crisis and recession, is scheduled to step down Jan. 31. Fed Vice Chairwoman Janet Yellen will succeed Bernanke, becoming the first woman to head the central bank.

On inflation, Bernanke said, "I think we have plenty of tools to manage interest rates and tighten monetary policy even if (the Fed's) balance sheet stays where it is or gets bigger."

Since the 2008 financial crisis, the Fed has launched several rounds of Treasury and mortgage bond purchases to push down long-term interest rates, swelling the Fed's balance sheet to more than $4 trillion. The Fed began to taper its most recent round of purchases last month and expects to end them by year's end. Some economists and Republicans in Congress have said the benefits of the stimulus have increasingly waned and the inflation risk has swelled.

To head off inflation, Bernanke has said the Fed can temporarily buy back many of the bonds it has purchased - a strategy know as "reverse repurchases" - to sop up money from the banking system. Bernanke also noted inflation remains well under the Fed's 2% annual target.

Another risk is that the Fed will take huge losses when it begins to sell off the bonds as bond prices fall and interest rates rise, sharply reducing or eliminating the payments it makes to the U.S. Treasury. Bernanke, however, noted the Fed already has supplied hundreds of millions of dollars to the Treasury. Thus, there would still be a huge net gain to federal coffers. "We have already not only helped the economy but helped the fiscal situation quite significantly."

Bernanke said the only genuine risk of the Fed's bond-buying is the danger of asset bubbles as low interest rates drive investments to riskier holdings, such as stocks, real estate or junk bonds. "That's the only risk I find personally credible," he said.

But he added that he thinks stocks and other markets "seem to be within historical ranges, the financial system is strong and the financial institutions are well capitalized. We're watching this very vigilantly."

He said that if bubbles -- such as the mid-2000s spike in real estate prices that led to a crash and the financial crisis -- begin to form, the Fed would be inclined to use its regulatory authority to pop them, rather than resort to raising interest rates.

Bernanke said he has been frustrated by fact that Congress has not helped the Fed stimulate growth, opting to cut spending rather than boost infrastructure spending, for example, and staging showdowns over raising the nation's borrowing authority.

"I have felt some frustration," he said. "Certainly those things have caused problems for the economy, they've hit confidence."

(Copyright © 2014 USA TODAY)

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