Fed might have to act if short-term cuts too severe, Bernanke says

Federal Reserve Chairman Ben Bernanke signaled Wednesday that the central bank might need to intervene if policymakers enact short-term spending cuts that hurt economic growth.

In a first-of-its-kind news conference, Bernanke stressed that he did not believe cuts already made by Congress would hurt the economy in any meaningful way in the short-term. And he said he hoped officials in Washington would concentrate on long-term deficit reduction.

“If the changes are focused entirely on the short run, then they might have some consequences for growth,” said Bernanke, seated behind a table for his roughly hour-long appearance. “And in that case, the Federal Reserve, which is — as always — going to try to set monetary policy to meet our mandate, will take those into account appropriately.  

“But so far,” he added, “I have not seen any fiscal changes that have really changed our near-term outlook.”

Speaking after the Federal Open Market Committee (FOMC), which sets monetary policy, released its quarterly policy decisions, Bernanke touched on several other subjects in his back-and-forth with reporters – including oil prices, the Fed's effort to balance its dual goals of tamping down inflation and promoting economic growth, and unemployment. 

The Fed chairman appeared more comfortable as the briefing progressed, even throwing out a joke or two by the end.

Bernanke called the spike in gas prices a “double whammy,” noting the increase both contributes to inflation and harms the economic recovery by keeping spending out of other areas. 

But he also suggested there was not much the Fed could do about prices, though he indicated he expects them to go down. Still, if gas prices remain high, Bernanke said, the central bank could be spurred into action.

“If we fear that inflation expectations look like they’re becoming less anchored, we would have to respond to that,” he said.

Asked if the Fed could do more to battle unemployment, Bernanke asserted that the central bank had taken “extraordinary measures” in recent years, including the two rounds of quantitative easing and the reduction of short-term interest rates to near zero. In a statement earlier Wednesday, the FOMC said the current round of quantitative easing would end, as scheduled, by the end of next month and that it expects interest rates to remain low for “an extended period.”

But Bernanke added that, in examining steps to fight unemployment, the Fed had to balance its dual mandate. 

“I think that even purely from an employment perspective, that if inflation were to become unmoored and inflation expectations were to rise significantly, that the cost of that in terms of employment loss in the future, as we had to respond to that, would be quite significant,” he said. 

Bernanke also said he thinks the markets will be prepared for when the $600 billion round of bond-buying – QE2 – ends, since the June end date had been well-telegraphed.

As for the event's lighter side, Bernanke gave a reporter a sly “Thanks, Mom” after being asked why the Fed had made the decision to start holding quarterly briefings. (The answer: It's the next step in a push for transparency.) 

And he suggested that he once had a penchant for losing chess matches to Ken Rogoff, his former graduate school colleague, the co-author of a book on 800 years of financial history and a one-time runner-up in the national chess championships.