Federal Reserve Board's Unhappy Task

by John M. Curtis
(310) 204-8700

Copyright February 18, 2011
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                  Taking heat from lawmakers domestically and abroad, Federal Reserve Board Chairman shows a steady hand, pulling all the right levers to keep the U.S. economy from plunging into a double-dip recession.  Since the financial collapse of 2007, former Fed Chairman Alan Greenspan tried to give an historical context to the latest financial collapse, leaving the nation’s biggest banks emptied of cash.  Greenspan said the epic financial meltdown occurs about once in a hundred years, the last one in 1907, prompting the Federal Reserve System’s creation in 1913.  Some lawmakers are driven mainly by politics to abolish the Fed and blame President Barack Obama and Bernanke for the current economic mess.  Without the Fed and Bernanke’s good stewardship, the U.S. economy would have plunged into another financial panic, maybe the second Great Depression.

            Some domestic lawmakers and those across the pond worry about hyperinflation, runaway food and commodity prices fueling the same stagflation seen in the early 1980s when interest rates, real estate, gas and food prices went through the roof.  Bernake’s easy monetary policy, keeping the Federal Funds rate at zero to a-quarter-of-a-percent, reflect the high levels of unemployment, hitting 10% Feb. 17, strongly hurting consumer demand for big ticket items like real estate, cars and major appliances.  Bernanke’s emphasis has been on setting monetary policy to produce maximum economic stimulus, simultaneously, supporting lawmakers’ continuation of Bush-era tax cuts.  Foreign central bankers in Europe and Asia criticize Bernanke’s low interest rate policy for driving down the dollar, increasing U.S. exports, reducing the trade imbalance and igniting inflation in emerging markets.

            U.S. officials have been guilty of similar insensitivity to growing currency fluctuations in China and elsewhere.  Chinese Premier Hu Jintao heard an earful from Obama and Treasury Secretary Tim Geithner about raising the value of the yuan or renmimbi, China’s undervalued currency.  Beranke, like Hu, has resisted outside pressure to increase interest rates at a time of sluggish economic growth.  Bernanke’s main worry at the moment is about deflation, not inflation.  When the G-20 meets today in Paris, Bernanke will tell his counterparts Bank of England chief Mervyn King and European Central Bank Chair Claude Trichet that Europe and Asia benefit from low U.S. interest rates.  Without strong U.S. employments, consumer demand and spending, Bernanke argues, European and Asian economies can’t generate enough export business to grow their economies 

            Bernanke told European central bankers that they have plenty of tools to combat commodity inflation, now plaguing European and Asian economies.   “Spillover can go both ways,” said Bernanke.  “Resurgent demand in emerging markets has contributed significantly to the sharp recent run-up in global commodity prices,” rejecting the idea that low U.S. interest rates causes inflation.  European and Asian central bankers were especially critical of Bernanke’s “quantitative easing,” where the Fed plans to buy some $600 billion in U.S. treasuries.    Bernanke said that European and Asian economies can respond to inflationary pressures to use “exchange rate adjustments, monetary and fiscal policy, and macroeconomic measures” to cool down overheated economies. With the U.S. unemployment rate hitting 10%, Bernanke knows that he must keep the pedal-to-the-metal to grow the economy.

            Floating or at least raising the yuan’s value would slow down growth in Chinese markets.   Keeping U.S. interest rates artificially low has the effect of devaluing the dollar and driving up exports.  Bernanke urged China to “allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports,” something China refuses to do.  Facing its own employment problems, China doesn’t want to raise its currency and price itself out of its preferred status for global manufacturing.  Unless the U.S. can begin generating more jobs, Gross Domestic Product growth could stay anemic for years.  Keeping interest rates low helps the stock market generate bigger returns, paving the way for the next bull market.  Rising stock markets generally put more cash into companies’ pockets, enabling them to begin hiring again and boost to consumer demand.

            Bernake has withstood withering criticism from conservative groups looking to abolish the Federal Reserve.  Without the Fed intervening aggressively in 2007, the economy would have likely double-dipped into recession.  Re-supplying banks’ lost capital from risky stock market investing helped minimize damage to the U.S. financial system.  “The global financial crisis is receding, but capital flows are very again posing some notable challenges for the international macroeconomic and financial stability,” said Bernanke, blaming overheated foreign markets on undervalued currencies.  Despite all the criticism, Bernanke shows the steady hand and wisdom to keep the U.S. economy from plunging into another recession.  Foreign and domestic criticism, especially from conservative U.S. lawmakers, reflect politics more than sound economic policy.  Keeping interest rates artificially low provides the best possible stimulus to an otherwise sluggish U.S. economy.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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