Fed chief says inflation will be tamed
Federal Reserve Chairman Ben Bernanke listens to opening statements during a House Oversight and Government Reform Committee hearing on Capitol Hill -- June 25, 2009.
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Kai Ryssdal: There was a real risk that our lead story today was going to be packed with words like liquidity and tightening of monetary policy. That's the chance you take when you talk about the Chairman of the Federal Reserve going to Capitol Hill. Instead, we're going to use the actual English translations. For almost a year now, the Fed's been pumping an unprecedented amount of money into the economy to get it going again. That's liquidity. At some point, though, all that easy money sloshing around will spark an unprecedented case of inflation. Which could result in higher interest rates. That's the tightening. But Mr. Bernanke took pains today to assure Congress he can handle it. John Dimsdale reports from Washington.
JOHN DIMSDALE: With no inflation in sight and the economy still not creating jobs, Bernanke said he and his colleagues at the Fed will keep interest rates low for the time being.
BEN BERNANKE: However, we also believe that it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed.
When the time comes to battle inflation, Bernanke said he plans to use a new weapon Congress gave the Fed last fall. Economist Nigel Gault at IHS Global Insight says the central bank can now pay banks to keep their money at the Federal Reserve.
NIGEL GAULT: By raising the interest rate that it pays on reserves deposited at the Fed, banks will choose to keep those reserves on deposit at the Fed, rather than lending them out into the economy.
But here's the tough part. When does the Fed start using tools like that? Timing is crucial and Bernanke was asked today how will he know.
BERNANKE: Since monetary policy takes time to work the only way we can do that is by trying to make a forecast. And we use large amounts of information, including qualitative information, anecdotes we receive, formal models, a whole range of techniques to try to estimate where the economy is likely to be a year, or year and a half from now. It's a very uncertain business, but it's really all we can do.
Working in the Fed's favor is a prediction the recovery will be gradual, giving policy makers a longer window to get the timing right.
In Washington, I'm John Dimsdale for Marketplace.