Criticism has mounted against the Federal Reserve’s easy-money policy; even within the central bank itself there are detractors who believe that its method of lowering interest rates in order to increase the available money supply could destabilize the financial system. But Chairman Ben Bernanke is more concerned about the across-the-board sequestration cuts set to take effect Friday, stating before Congress on Tuesday that the $85 billion in cuts to the federal budget combined with the earlier tax increases could pose a “significant headwind” for the economic recovery.
Despite the nearness of sequestration, the primary reason for Bernanke’s appearance before the Senate Banking Committee, reported on by Reuters, was to defend the Fed’s bond-buying stimulus program. He argued that its benefits exceed any possible costs.
The potential problems are numerous — the Fed’s record $3.1 trillion balance sheet may encourage excessive risk-taking by investors and complicate its exit from the stimulus program — yet Bernanke said that the Fed’s policymakers are aware of the potential risks of their extraordinary support for the economy. These concerns are immaterial at the moment, in his estimation.
“To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Bernanke told the committee…