Bernanke defends Fed’s loose monetary policy

An accommodative stance on monetary policy is the right choice for the US and will not create problems for the world's largest economy, Federal Reserve chairman Ben Bernanke said in a speech on October 1.

Bernanke defended the Fed's decision to introduce a third round of quantitative easing (QE3) from critics, including Federal Reserve Bank of Richmond president Jeffrey Lacker, who suggested the actions would have limited benefits and could cause inflation in the future. Lacker was the only member of the Federal Open Market Committee to vote against QE3. Bernanke said such fears were not justified. "The case seemed clear to most of my colleagues that we could do more to assist economic growth and the job market without compromising our goal of price stability," he said.

Addressing the potential inflationary impact, Bernanke said as QE securities purchases were made in the banking system, this would not immediately translate into more cash in circulation and therefore inflation. "Indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years," he said.

To respond to future inflation, the "key question", Bernanke said, was whether the Fed would be able to raise interest rates when appropriate. "I'm confident we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way," he said.

An additional concern about current loose monetary policy by the Fed is that it could delay fiscal consolidation by making it easier for the government to borrow. "I find this argument unpersuasive," Bernanke said, adding that raising interest rates to enforce fiscal discipline would not only be acting outside the Fed's price stability mandate, but would also likely make the fiscal problems worse.

Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery

Nevertheless, Bernanke called on policy-makers to act to address the so-called 'fiscal cliff', a combination of higher taxes and reduced spending that will be automatically introduced at the beginning of 2013, and to raise the US debt ceiling to prevent a default. "Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery," he said.