The chairman of the House Financial Services Committee took aim Thursday at the Federal Reserve’s belief that inflation rather than slow growth poses the greatest risk to the economy.
Rep. Barney Frank told Fed Chairman Ben Bernanke he was a “little puzzled” by Bernanke’s position, arguing that prospects of slower growth seemed to him to be equally as important a risk as the possibility of a flare-up of inflation.
Frank, D-Mass., said he found the central bank’s identification of inflation as the bigger risk “troubling.”
Bernanke, appearing before Frank’s panel to deliver the Fed’s semiannual report to Congress, defended the Fed’s assessment of the inflation threat. “In order for this expansion to continue in a sustainable way, inflation needs to be well controlled,” the Fed chairman insisted.
Frank shot back: “I can understand it (inflation) being a concern. I don’t understand how ... it outweighs the other.”
The tense exchange was a tiny bump in an otherwise smooth and cordial hearing where Bernanke fielded wide-ranging questions on the nation’s record-high trade deficit, trade competition from China, concerns about widening economic inequality between high-and low-income workers, and the strain on the country’s balance sheets with a massive wave of retiring baby boomers.
When asked what impact Congress’ efforts to boost the federal minimum wage would have on employment, Bernanke said he didn’t think it would be “very significant one way or the other” because only a relatively small number of workers currently earn the federal minimum.
Economists, though, generally agree that a higher minimum wage would have “an adverse” effect on employment but disagree over how big it would be, he added.
It was the second day in a row that Bernanke was on Capitol Hill giving lawmakers a review of the economy. On Wednesday, he offered senators a mostly upbeat assessment of country’s economic prospects, citing improvements in inflation and housing.
Many economists viewed those remarks as suggesting the Fed will leave interest rates alone for a while.
The Fed has held a key interest rate steady at 5.25 percent since August, giving borrowers a reprieve. Before that, the central bank steadily had raised rates for two years, the longest ever stretch of increases, to fend off inflation.
Still, Bernanke on Wednesday and again Thursday made clear that the threat of inflation is the “predominate” risk to the economy in the Fed’s mind. That’s why Bernanke and his Fed colleagues are holding open the possibility of further rate increases in the event that inflation takes an unexpected turn for the worse.
“If inflation becomes higher for some reason, then the Federal Reserve would have to respond to that by raising interest rates,” the Fed chairman said Thursday.
Under the Fed’s forecast, underlying inflation is expected to wane this year, while economic growth is expected to be slower compared with last year.
In general, the Fed would boost rates to ward off a serious inflation threat and would cut rates if economic growth seemed in danger of stalling.
Bernanke, a former college professor and respected economist, took the Fed helm a year ago, succeeding longtime chairman Alan Greenspan.
House lawmakers — as did most senators on Wednesday — said Bernanke is doing well so far in steering the economy. They also commended his plain-speaking style and his efforts to improve the Fed’s communications’ with Wall Street and Main Street.
