20101109, Article, contributied by Juhye, Lyu

Bernanke Says Fed's Monetary Expansion Won't Spur `Super-Normal' Inflation By Scott Lanman and Steve Matthews - Nov 7, 2010 3:24 AM GMT+0900 Tweet (31) LinkedIn Share Print Email As recoveries from the subsequent global recession now prove uneven, Fed Chairman Ben S. Bernanke and his counterparts are focusing on the needs of their individual economies. Photographer: Andrew Harrer/Bloomberg Federal Reserve Chairman Ben S. Bernanke, adding to his defense of this week's expansion of record monetary stimulus, dismissed the idea the central bank will increase inflation higher than it prefers. "I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy," Bernanke said today in a panel discussion at a Fed conference in Jekyll Island, Georgia. "Our credibility must be maintained," and "it's critical for us to maintain inflation at an appropriate level," he said. Policy makers led by Bernanke, a former Princeton University economist who studied the Great Depression, decided Nov. 3 to resume large-scale asset purchases in an effort to reduce unemployment and avert deflation. The Fed is buying $600 billion of Treasuries through June after lowering the benchmark rate almost to zero and carrying out a $1.7 trillion first round of asset purchases that ended in March. "We're not in the business of trying to create inflation," said Bernanke, who spoke on the panel alongside his predecessor, Alan Greenspan, and former New York Fed President E. Gerald Corrigan, to an audience including more than a dozen current and former Fed policy makers. "Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation which I think we all agree would be a worse outcome," Bernanke said. Broached Idea New York Fed President William Dudley and Chicago Fed President Charles Evans broached the idea in speeches last month that the Fed could target higher-than-normal inflation temporarily as a way of trying to aid growth. Critics including Allan Meltzer, a Fed historian, say the central bank may not be able to control inflation resulting from the securities buying. Corrigan, 69, said that "even in the face of substantial margins of underutilization of human and capital resources, efforts to achieve an upward nudge in today's very low inflation rate make me somewhat uncomfortable." Corrigan was a policy maker under former Fed Chairman Paul Volcker, who raised interest rates as high as 20 percent to beat inflation, pushing the economy into the 1981-82 recession. 'Great Leaders' In prepared remarks distributed to attendees, Corrigan said he has a "very high degree of confidence in the Fed's ability to navigate through these uncharted waters" and that his concern about "low probability contingencies" doesn't detract from his "admiration and respect for the Fed and its tradition of great leaders past and present." Bernanke said the central bank's asset purchases are "just a different set of tools" for monetary policy aimed at increasing growth and inflation. "There's a sense out there that, quote, quantitative easing or asset purchases is something completely foreign" or "strange" and that "we have no idea what the hell is going to happen, and it's just an unanticipated, unpredictable policy," he said. "Quite the contrary, this is just monetary policy." The Fed's preferred gauge for consumer prices, which excludes food and energy costs, rose 1.2 percent in September from a year earlier, the slowest pace since 2001. Fed policy makers have a long-run goal of 1.7 percent to 2 percent inflation that they see as consistent with achieving legislative mandates for maximum employment and stable prices. Fed Chief The Fed chief spoke at a conference on Fed history sponsored by the Atlanta Fed and Rutgers University at the site of a secret 1910 meeting in which a senator and several bankers devised a plan which would provide some of the elements of the Federal Reserve Act signed in 1913. Bernanke singled out an opinion article this week by Meltzer in the Wall Street Journal sayingMilton Friedman, the Nobel-winning economist who died in 2006 and shaped the thinking of many Fed officials, would not support the Fed's decision to expand asset purchases. "We are doing everything Milton Friedman would have us do," Bernanke said at the conference. "What Milton Friedman would say is that the Federal Reserve is responsible for the stability of nominal aggregates including prices, and that means that particularly with respect to inflation, you don't want inflation to be too high but you also don't want it to be too low." Repeats Mistakes Meltzer, in a Bloomberg Television interview yesterday, said the Fed, by increasing stimulus, "repeats the kind of mistakes they made in the 1970s." "Much more often than not, the Fed has made mistakes in erring on the side of too little restraint and too much inflation," said Marvin Goodfriend, a former Richmond Fed research director who now works with Meltzer as a professor at Carnegie Mellon University in Pittsburgh. Now the Fed faces "some more two-sided risks," and "when you approach price stability, sometimes it is warranted to be worried about too little inflation," Goodfriend said after the panel discussion. Greenspan said the major lesson from the financial crisis is that U.S. banks need more capital to survive shocks. Banks operated with less capital because of an assumption they would be rescued by the government, he said. Lehman Brothers Holdings Inc. wouldn't have failed with adequate capital, he said. "Rampant fraud" was also an issue, he said. Lack of Trust "Fraud creates very considerable instability in competitive markets," Greenspan said. "If you cannot trust your counterparties, it would not work." Today's remarks are Bernanke's third set of public comments since the decision by the Fed's Open Market Committee. Yesterday, he said to students in Jacksonville, Florida, that theunconventional policy will avert a decline in inflation and spur the U.S. recovery. It has the goal of reducing borrowing costs, adding stimulus and, "we hope, creating a faster recovery and an inflation rate consistent with long-run stability." Bernanke, 56, chairman since 2006, said in a Washington Post opinion article hours after the decision that the central bank "will take all measures necessary to keep inflation low and stable." The Fed chief came under fire yesterday from officials in Germany, China, and Brazil who said his plan to pump cash into the banking system will jar other economies and fail to fuel U.S. growth. To contact the reporter on this story: Scott Lanman in Jekyll Island, Georgia atslanman@bloomberg.net; Steve Matthews in Jekyll Island, Georgia atsmatthews@bloomberg.net. To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net