Bernanke answers Fed's global critics

Federal Reserve Chairman Ben Bernanke on Friday defended the U.S. central bank's bond-buying against beggar-thy-neighbor criticism, saying the return to a strong U.S. economy was critical for global stability.

He suggested doing so would bolster a dollar whose weakness has sparked cries of foul from Bogota to Beijing.

The Fed's decision to buy $600 billion of government debt has drawn scathing comments from nations which contend it is generating global instability by strengthen their currencies against the dollar, inflating asset bubbles and fueling inflation in their economies.

From Berlin German Finance Minister Wolfgang Schaeuble pronounced, "With all due respect, U.S. policy is clueless."

Bernanke, answering questions from college students in Florida, stressed that Fed policies aimed at giving a boost to the weak U.S. recovery would pay dividends around the world.

"I think it's important to emphasize ... that a strong U.S. economy, a recovering economy, is critical, not just for Americans, but it's also critical for the global recovery," Bernanke said.

G20 Tensions

The Fed's easy monetary policy, made even looser on Wednesday with the new bond-buying plan, has rankled emerging market economies and others, and it looks set to be a bone of contention at a Group of 20 nations summit in Seoul next week.

South African Finance Minister Pravin Gordhan said Fed policy "undermines the spirit of multilateral cooperation" that the G20 had sought to achieve. The money will find its way into financial markets of emerging nations with potentially devastating impact on their exports, he charged.

Bernanke said U.S. policymakers were fully aware of the dollar's importance in the global economy as a reserve currency. The dollar has weakened sharply and did so again after this week's decision on a new round of so-called quantitative easing.

"The best fundamentals for the dollar will come when the economy is growing strongly," Bernanke said. "That's where the fundamentals come from."

He told the students that while commodity prices have risen sharply, they were the exception amid generally muted prices for other products and should not cause a serious problem.

Bernanke said there was ample slack in the U.S. economy that will prevent producers from being able to fully price costlier commodities into finished products that consumers buy.

"Globally traded commodities like energy, food ... have been going up pretty sharply," he said. "Where there's a lot of slack in the economy ... it's very, very difficult ... for producers to push through those costs to the final consumer."

Slack to Spare

He added that once inflation pressures become visible, the U.S. central bank will be ready to modify its current stance of accommodative monetary policy to block inflation.

Official interest rates have been near zero for nearly two years.

"It's going to take some further growth and some further reduction in slack before we begin to see any kind of inflation pressure," he said.

Not all Fed officials share Bernanke's confidence that inflation can be held in check. Kansas City Federal Reserve Bank President Thomas Hoenig renewed his call for higher interest rates on Friday, saying in a speech to real estate agents that the new bond-sales program risks igniting inflation and another boom and bust cycle.

Critics of the Fed's easy money policy might point to signs of improvement in the U.S. employment market, where employers added jobs for the first time since May, as evidence the new asset purchases are unnecessary. [nN04265378] But analysts said the pace of job creation as not enough to pull down the unemployment rate.

"It's still probably not enough to get the Fed convinced the unemployment rate is going to go down or inflation is going to go up," said John Canally, an economist at LPL Financial in Boston.

Most dealers polled by Reuters said they expect the Fed to have to expand or extend its program to boost the economy with asset sales. Economists at firms that deal directly with the Fed said they did not expect unemployment go below 9.3 percent before July 2011.

[Source: By Pedro Nicolaci da Costa, Reuters, Jacksonville, Florida, 05Nov10]

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