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In an op-ed piece, Bernanke defends Fed's new stimulus plan

November 3, 2010 |  6:32 pm

Federal Reserve Chairman Ben S. Bernanke is taking his case for the central bank’s latest economic stimulus measure directly to the people.

In an unusual op-ed piece on the Washington Post’s website, published after the Fed’s policy meeting Wednesday, Bernanke defends the central bank’s decision to buy another $600 billion in U.S. Treasury bonds over the next eight months.

The controversial move, which was telegraphed by the Fed over the last few months, is aimed at pumping more money into the economy and putting downward pressure on longer-term interest rates.

Bernanke takes a populist approach in explaining the Fed’s action.

Benbfed Despite the Fed’s massive efforts to cut the cost of money over the last two years, “Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10%, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer,” Bernanke writes. “The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.”

So the Fed was motivated to do more to help bolster growth, he said.

As for critics’ contentions that the bond-buying program won’t have the intended effects, Bernanke argues otherwise -- though his evidence is what has occurred in financial markets leading up to Wednesday’s announcement.

“This approach eased financial conditions in the past and, so far, looks to be effective again,” he writes. “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

The Fed chief also addresses critics’ assertion that the central bank could end up driving inflation sharply higher by flooding the financial system and economy with more dollars via bond purchases.

“Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated,” Bernanke writes. “Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.

“Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time.”

Bernanke doesn’t address another criticism: that the Fed’s huge new round of Treasury purchases makes the central bank the government’s partner in continuing to run up $1-trillion-plus annual budget deficits.

-- Tom Petruno

Photo: Fed Chairman Ben S. Bernanke. Credit: Larry Downing / Reuters