–Need To Avoid Repeat Of Disruption Caused By Debt Impasse
–FOMC In ‘Unprecedented Situation'; Some Dissent Natural
By Brai Odion-Esene
WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Thursday
offered a mild critique of the U.S. political process for making fiscal
decisions, calling for a better system to avoid the debt ceiling
standoff that caused so much disruption to financial markets and led to
a U.S. sovereign rating downgrade.
Bernanke also explained away the very public dissent by some Fed
officials against the central bank’s measures to support the economic
recovery, saying the “unprecedented situation” means disagreement on the
best way to proceed is to be expected.
Taking questions following a speech to the Economic Club of
Minnesota, Bernanke said while the U.S. federal budget is not on a
sustainable path, it is important that lawmakers be attentive to current
economic conditions “and make sure what we do is constructive in terms
of our recovery.”
President Obama is set unveil a multi-billion dollar jobs package
before a nighttime joint-session of Congress, and Bernanke stressed that
fiscal policy is very important for long-term growth.
“We have to think about how to invest on the spending side, how to
reform and improve our tax code on the revenue side, so that our fiscal
policies are most conducive to long-run growth,” he said.
Most importantly, all this has to be achieved in a manner that is
not disruptive to financial markets, “as the discussions over the summer
did prove to be,” Bernanke warned.
Bernanke pointed out that the downgrade by Standard & Poor’s of the
U.S. rating to ‘AA+’ was not a question of economics, “what S&P pointed
to was the process.”
“We need a better process so that we don’t have the same
consequences that we saw with the downgrade and some of the financial
volatility that was associated with the process this summer.”
Fortunately there has not, so far at least, been a permanent impact
on government’s borrowing costs from the downgrade, he noted, although
some other borrowers besides the U.S. Treasury have been affected.
While Bernanke would not be drawn on exactly what he would do to
improve the system, he did make a number of observations.
Achieving fiscal sustainability is a long-run process that
requires a long-run outlook to address rising entitlement costs, he
said. “Therefore I hope that in thinking about their fiscal policies
that Congress will look at a long horizon and think about the entire
horizon in their process.”
Bernanke also noted some countries around the world, such as
Switzerland, have fiscal rules in place that are intended to help
provide a framework for policymakers to make “good, coherent” long-term
decisions.
“I do think it is very important that we all get together and make
sure that, in the future, we are making our decisions in a way that is
not as disruptive as it was this last time around,” he reiterated.
This will provide a sensible outlook for the United States, that
would in turn help the economy both recover from recession and grow in
the long-term.
The debt agreement between the White House and Congress in early
August included the creation of a ‘Super Committee’ to come up with
additional ways to reduce the deficit.
Bernanke stressed that while these measures are constructive, it is
only the first step. “More will need to be done to create long-term
sustainability,” he said.
Asked to comment on the public dissension of some members of the
Fed’s policymaking Federal Open Market Committee against continued
efforts to support the faltering economic recovery, Bernanke said such
disagreement is to be expected.
“The reason we have a committee is to bring different points of
view and different … perceptions of the economy,” he said.
The best way to make policy is to encourage both internal and
external debate and discussion about the right approach, Bernanke added.
“Currently we are in a situation which, in many ways, is
unprecedented,” he said, from the problems afflicting the economy, to
the unconventional policies the Fed has been forced to deploy because
interest rates are already close to zero.
So it is natural to have some disagreement, and the goal is to
bring the different opinions together and attempt to reach a consensus.
“It won’t always be available but we will do our best to find a middle
ground,” Bernanke said.
Bernanke also fielded questions about the U.S. dollar, and repeated
his confidence about the greenback’s future as the global reserve
currency, while also assuring that the Fed’s dual mandate will help keep
the dollar strong.
The fact that the dollar remains the world’s reserve currency does
provide some benefits for the United States, he said, for instance
allowing interest rates to be lower than they would be otherwise.
“The dollar at this point remains the currency of choice, I suspect
that will continue to be the case for some time,” Bernanke said.
This is not just due to the underlying strength of the U.S.
economy, but very importantly, the size, depth, and liquidity of its
financial markets, he added. “The ability to buy and sell, transact
easily, is very important to holders of liquid assets and that’s one of
the reasons [that] the dollar has remained a key currency.”
Given that the Fed is tasked with the dual objectives of maximum
employment and price stability, its policies ultimately benefit the
dollar, Bernanke argued.
Low inflation means that the buying power of the dollar, in terms
of domestic goods and services, remains stable over time, he said. And
while low inflation might not have an immediate impact on the exchange
rate value of the dollar, there is a close connection in the long run.
“Specifically, in the medium term the value of the dollar depends
basically on two things,” Bernanke said. “It depends on our inflation
rate relative to other inflation rates in other countries, and it
depends on the strength of our economy.”
Having kept inflation lower than most countries, and currently
trying to grow the economy, the Fed’s mandate “is consistent with a
strong dollar policy,” he said.
** Market News International Washington Bureau: 202-371-2121 **
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