JULY 22, 2009By JON HILSENRATH
Federal Reserve Chairman Ben Bernanke made a guarded declaration of success Tuesday before a skeptical and sometimes combative audience, saying Fed policies had helped to set the stage for a modest recovery this year.
In his semiannual testimony to Congress on the economic outlook, Mr. Bernanke laid out the case that growth is returning, saying businesses and consumers could be nearer to a resumption of spending after wrenching cutbacks. He also turned up the heat on Congress and the White House to get budget deficits under control or risk damaging the recovery.
"Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system," Mr. Bernanke opened in his prepared testimony, adding later, "many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve to encourage the flow of credit."
Michael Feroli, an economist at J.P. Morgan, called it, "one of the most pointed defenses of the Fed's actions so far" in the current crisis. It had a starkly political undertone, coming as lawmakers consider whether to rein in the Fed's autonomy in response to its controversial decisions in the crisis.
As markets reeled six months ago, the last time he formally briefed Congress on the economy, Mr. Bernanke offered a bleak outlook and vowed to use "all available tools" to stimulate growth.
The Fed projects the economy will be growing again by year end and will expand at a modest pace between 2.1% and 3.3% in 2010. But the job market -- another of the big risks to the outlook -- is expected to lag far behind, with the unemployment rate stalled well above 9% through 2009. The drag of high unemployment, Mr. Bernanke warned, could be a weight that holds back consumer spending and growth.
Investors were heartened that Mr. Bernanke made clear the Fed doesn't plan to raise interest rates from near zero until the job market shows clearer signs of improving and until the other kinds of economic slack -- like unused factory capacity -- are brought down. The Dow Jones Industrial Average rose 67.79 points, or 0.8%, to 8915.94. Prices on inflation-sensitive 10-year Treasury notes rose, pushing their yield down to 3.477%.
Mr. Bernanke also detailed his plans for how he will withdraw -- when needed in the future -- the hundreds of billions of dollars of cash the Fed has pumped into banks. The money went into banks to stop the market meltdown but could cause inflation if not withdrawn in time.
Though lawmakers were mostly respectful toward the Fed chairman, his reception showed he has a long way to go to win over congressional skeptics.
Lawmakers have attacked the Fed's rescues of big financial firms like American International Group Inc. and Bank of America Corp. Now they are considering proposals that would remake the way the central bank operates after the crisis. One popular proposal would subject Fed policy to congressional audits, something Mr. Bernanke strongly opposes. A plan by President Barack Obama would give the Fed more power to oversee big important banks, but many lawmakers are reluctant to add to the Fed's responsibilities.
In his semiannual testimony to Congress on the economic outlook, Mr. Bernanke laid out the case that growth is returning, saying businesses and consumers could be nearer to a resumption of spending after wrenching cutbacks. He also turned up the heat on Congress and the White House to get budget deficits under control or risk damaging the recovery.
"Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system," Mr. Bernanke opened in his prepared testimony, adding later, "many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve to encourage the flow of credit."
Michael Feroli, an economist at J.P. Morgan, called it, "one of the most pointed defenses of the Fed's actions so far" in the current crisis. It had a starkly political undertone, coming as lawmakers consider whether to rein in the Fed's autonomy in response to its controversial decisions in the crisis.
As markets reeled six months ago, the last time he formally briefed Congress on the economy, Mr. Bernanke offered a bleak outlook and vowed to use "all available tools" to stimulate growth.
The Fed projects the economy will be growing again by year end and will expand at a modest pace between 2.1% and 3.3% in 2010. But the job market -- another of the big risks to the outlook -- is expected to lag far behind, with the unemployment rate stalled well above 9% through 2009. The drag of high unemployment, Mr. Bernanke warned, could be a weight that holds back consumer spending and growth.
Investors were heartened that Mr. Bernanke made clear the Fed doesn't plan to raise interest rates from near zero until the job market shows clearer signs of improving and until the other kinds of economic slack -- like unused factory capacity -- are brought down. The Dow Jones Industrial Average rose 67.79 points, or 0.8%, to 8915.94. Prices on inflation-sensitive 10-year Treasury notes rose, pushing their yield down to 3.477%.
Mr. Bernanke also detailed his plans for how he will withdraw -- when needed in the future -- the hundreds of billions of dollars of cash the Fed has pumped into banks. The money went into banks to stop the market meltdown but could cause inflation if not withdrawn in time.
Though lawmakers were mostly respectful toward the Fed chairman, his reception showed he has a long way to go to win over congressional skeptics.
Lawmakers have attacked the Fed's rescues of big financial firms like American International Group Inc. and Bank of America Corp. Now they are considering proposals that would remake the way the central bank operates after the crisis. One popular proposal would subject Fed policy to congressional audits, something Mr. Bernanke strongly opposes. A plan by President Barack Obama would give the Fed more power to oversee big important banks, but many lawmakers are reluctant to add to the Fed's responsibilities.
"The Fed's made some big mistakes," Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee, said before Mr. Bernanke started talking. "Historically, the board has done a poor job of identifying and addressing systemic risks before they become crises."
Mr. Bachus pointed to the near-collapse of CIT Group Inc. as the latest example -- it became a bank holding company under Fed supervision last December and required a private-sector rescue this week.
When Mr. Bernanke said congressional audits would expose the Fed to dangerous political pressure, the bill's sponsor, Texas Republican Rep. Ron Paul, shot back, "It's not like it's not politicized now."
Mr. Bernanke had a different critique of his own -- for Congress and the White House. Earlier this year, the Fed chairman supported the $787 billion fiscal-stimulus plan that passed against Republican objections. Tuesday, the Fed chairman said lawmakers now need to focus on reining in government budget deficits over the long run.
A deficit-reduction plan, he said, could yield immediate benefits in the form of lower long-term interest rates and improved business confidence. If the White House and Congress failed to produce a credible plan to reduce the deficit in the long-run, he warned, "we risk having neither financial stability nor durable economic growth."
Mr. Bachus pointed to the near-collapse of CIT Group Inc. as the latest example -- it became a bank holding company under Fed supervision last December and required a private-sector rescue this week.
When Mr. Bernanke said congressional audits would expose the Fed to dangerous political pressure, the bill's sponsor, Texas Republican Rep. Ron Paul, shot back, "It's not like it's not politicized now."
Mr. Bernanke had a different critique of his own -- for Congress and the White House. Earlier this year, the Fed chairman supported the $787 billion fiscal-stimulus plan that passed against Republican objections. Tuesday, the Fed chairman said lawmakers now need to focus on reining in government budget deficits over the long run.
A deficit-reduction plan, he said, could yield immediate benefits in the form of lower long-term interest rates and improved business confidence. If the White House and Congress failed to produce a credible plan to reduce the deficit in the long-run, he warned, "we risk having neither financial stability nor durable economic growth."
"He laid out the Fed's exit strategy and basically said, 'Alright, let's see your exit strategy,'" J.P. Morgan's Mr. Feroli said.
The budget for the current fiscal year released by the White House's Office of Management and Budget in May projects the deficit will total more than $1.8 trillion in the 12 months ending Sept. 30, or 13% of gross domestic product.
Some investors worry the Fed will be forced to help the government finance its growing budget deficits by ramping up its purchases of U.S. Treasury bonds. By speaking out against the deficit, the Fed chairman staked out ground as an independent actor.
Still, he put his hands on a political football. Republicans used his deficit concerns to argue against Mr. Obama's fiscal-stimulus plan and the president's effort to rewrite health-care laws, which could fatten the deficit further still. Mr. Bernanke said lawmakers needed to find ways to hold down government health-care spending.
The budget for the current fiscal year released by the White House's Office of Management and Budget in May projects the deficit will total more than $1.8 trillion in the 12 months ending Sept. 30, or 13% of gross domestic product.
Some investors worry the Fed will be forced to help the government finance its growing budget deficits by ramping up its purchases of U.S. Treasury bonds. By speaking out against the deficit, the Fed chairman staked out ground as an independent actor.
Still, he put his hands on a political football. Republicans used his deficit concerns to argue against Mr. Obama's fiscal-stimulus plan and the president's effort to rewrite health-care laws, which could fatten the deficit further still. Mr. Bernanke said lawmakers needed to find ways to hold down government health-care spending.
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