Most everyone agrees that the economic recovery remains disappointingly slow. But there is no consensus on how much the Federal Reserve should do about it.
Today, Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee about the outlook for the economy and federal budget. That outlook was much as the Federal Open Market Committee indicated after its meeting last week--near-zero interest rates may be warranted through 2014, and external pressures from Europe continue to threaten the U.S. economy. Bernanke also predicted slow growth and prolonged, elevated unemployment. However, some committee members questioned the chairman on whether addressing unemployment should be in the Fed's purview.
Wisconsin Republican Rep. Paul Ryan, the committee chair, took aim at the Fed's focus on unemployment alongside inflation. "The Fed's tools for promoting employment are limited, imprecise, and can have highly undesirable unintended consequences," he said in his opening statement. On the other hand, he noted, "the Fed is uniquely positioned to protect the currency."
Democratic Rep. Chris Van Hollen, the ranking member, shot back in his statement. "We must use all the tools at our disposal to help put people back to work," he said, later adding, "I find it troubling that, at a time when millions of Americans are still out of work, some of our Republican colleagues want to strip the Federal Reserve of that part of its mandate that focuses on full employment and putting people back to work."
The issue in question is the Federal Reserve's dual mandate. While the Fed once had a single mandate of controlling inflation, Congress in 1977 gave the Fed the additional goal of fostering maximum employment.
The dual mandate has come under fire for being ineffective, as policies promoting employment and price stability can sometimes be at cross purposes. The quantitative easing that the Fed undertook in response to the financial crisis is an example of a policy that some economists say can promote employment. However, massive asset purchases by the central bank can also boost inflation.
Bernanke today said that the two goals can be "complementary" and that the Fed is seeking a balanced approach between targeting inflation at 2 percent and moving the unemployment rate between 5.2 and 6 percent, which it views as a long-term goal for unemployment given current conditions.
"My concern is that this appears less to be an inflation-targeting statement than an inflation-equivocation statement," said Ryan, explaining that he fears that in focusing on lower unemployment, the Fed will allow inflation to grow too high.
Under questioning by Texas Republican Rep. Lloyd Doggett, Bernanke acknowledged that the Fed's tools for price stability are more effective than those it has for long-term unemployment: "The difference between inflation and unemployment is that we can control inflation in the long run. We cannot control unemployment in the long run."
The chairman also defended the Fed's record on inflation, adding that the central bank is simply doing its job. "The dual mandate has worked fine. We have as good an inflation record as any other central bank. … That being said, Congress created the Fed, Congress gave us our mandate. If you determine that you want to change it, we will do whatever you assign us to do."
While committee members critiqued the Fed's operations, Bernanke had his own guidance for Congress regarding the budget, advising representatives that putting fiscal policy on a sustainable path "should be a top priority."
One key area in which fiscal strains can be eased, said Bernanke, is the spiraling cost of healthcare: "I think the elephant in the room is really healthcare costs. … We're heading towards 9 or 10 percent of GDP just for federal spending on healthcare, and another 8 or 9 percent eventually in private-sector healthcare spending."