Bernanke defends Fed in letter to Issa

Federal Reserve Chairman Ben Bernanke defended the central bank's policy moves in a letter to Congress on Friday and said the Fed is prepared to do more to help the economy. 

In a letter sent to House Oversight Committee Chairman Darrell Issa (R-Calif.), Bernanke said the Fed's efforts have "substantially helped the U.S. economy," adding that the institution will not hesitate to do more if officials deem it necessary. A copy of the letter was obtained by The Hill, and first reported by The Wall Street Journal.

Bernanke's letter, dated Wednesday, is a response to critical questions posed by Issa in a letter sent Aug. 1, in which the Republican chairman cited a "persistent drumbeat" of criticism from economists who "express great concern" about the Fed's policy actions.

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Bernanke was resolute in his defense of the Fed, and made clear the central bank will not shy away from taking action on the economy.

"The committee will closely monitor incoming information on economic and financial market developments and will provide additional accommodation as needed to promote a stronger economic recovery," he wrote, adding that the central bank has "scope for further action."

The central bank has kept interest rates near zero for several years, and has said it plans to keep them there through the end of 2014. However, with rates already as low as they can go, the Fed has also embarked on novel efforts to further assist the economy, most notably via two rounds of massive bond purchases known as "quantitative easing."

The recent slowdown of economic growth has set off fresh speculation in financial markets that the Fed could take on a third round of easing in the near future. Minutes recently released by the Fed showed several officials believed further steps would be needed "fairly soon" if economic growth did not pick up the pace.

However, those efforts have been met with heightened criticism from conservatives, including Republicans in Congress, who have urged the Fed to resist attempts to do more for the economy because of a heightened risk of damaging inflation down the line.

Bernanke defended the two easing efforts to Issa, saying they "helped to promote a stronger recovery than otherwise would have occurred" and helped stave off potential deflation.

He also noted in his letter that the Fed's recent decision to extend a project known as "Operation Twist," which has the Fed reorienting its portfolio in a bid to lower borrowing costs, is still "working its way through the economic system." 

However, he added that the Fed must make policy decisions based on forecasts of future economic performance, leaving the door open for action in the near future if the Fed finds it necessary.

As the election draws near and the economy retains the spotlight, some have suggested moves by the Fed so close to November could be seen as carrying a political tinge, favoring one candidate over the other. But Bernanke insisted that the Fed's mission was simply to fulfill its dual mandate of maximizing employment and controlling inflation, as laid out by Congress. The central bank is "steadfast" in that mission, he wrote.

Republicans and a growing number of Democrats are pressing for further scrutiny of the Fed's moves. The House easily cleared a bill that would allow the Government Accountability Office to fully review the Fed's actions, including its monetary policy decisions. Mitt Romney, the presumptive Republican nominee, has thrown his support behind the measure.

Bernanke, as he has been in the past, was fiercely protective of the Fed's independence in his letter. He previously had described the Fed audit bill, long pushed by Rep. Ron Paul (R-Texas), as creating a "nightmare scenario" for the Fed, knowing Congress would be looking over its shoulder.

"The Federal Reserve's independence gives it the latitude which is critically important to pursue its statutory mandate without consideration of political factors," he wrote to Issa.