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Fed's low interest-rate-policies benefit trade, Bernanke says

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By The Associated Press
Tuesday, March 26, 2013, 12:01 a.m.
 

WASHINGTON — The Federal Reserve's low-interest-rate policies are helping to boost growth around the world, Chairman Ben Bernanke said on Monday, rejecting criticism that they could lead to a global currency war.

In a speech at the London School of Economics, Bernanke staunchly defended the Fed's policies and similar stimulus efforts pursued by other central banks since the 2008 financial crisis.

Last week, the Fed stood by its policies to keep borrowing costs at record lows, saying the U.S. economy still required the support to help lower high unemployment.

Critics have argued that the low-interest-rate policies could lower a country's currency value and make its products more competitive on global markets.

Some have blamed such policies for making the Great Depression worse during the 1930s. Countries devalued their currencies and raised tariffs, which made foreign-made goods more expensive and stunted trade. They became known as “beggar-thy-neighbor” policies.

Bernanke argued that the situation is different today because the low-interest-rate policies have the primary aim of boosting domestic growth, not trying to lower the value of a nation's currency.

“Because stronger growth in each economy confers beneficial spillovers to trading policies, these policies are not ‘beggar-thy-neighbor' but rather ... ‘enrich-thy-neighbor' actions,” Bernanke said.

The efforts should support stronger trade flows, Bernanke said. By boosting growth in major economies, consumers can buy more imported goods from developing countries.

In addition to concerns about currency wars, critics have said the policies adopted by the Fed and other central banks could increase the risk of inflation and destabilize financial markets.

Panelist Axel Weber, a former president of Germany's central bank and now chairman of the board of Swiss bank UBS, spoke to those concerns. He said central banks will be pressed to develop policies that wind down their stimulus without triggering “even bigger problems.”

During a question-and-answer session after the speech, Bernanke neither addressed Weber's concerns directly nor offered hints about the direction of U.S. interest rates.

But former Treasury Secretary Larry Summers, a member of the panel and a supporter of the Fed's policies, said the biggest threat to the economy is high unemployment.

“The risks of stagnation are an inherently greater concern than inflation,” Summers said.

The Fed's policies are aimed at lowering unemployment, which has fallen to 7.7 percent but is above healthy levels.

After its two-day meeting last week, the Fed said it would stick with its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent.

The Fed regards the 6.5 percent unemployment level as a threshold and not a “trigger” for a possible rate increase, Bernanke said.

The Fed said it would keep buying $85 billion a month in bonds to hold long-term borrowing costs in check. Lower rates encourage more borrowing and spending, which leads to faster growth and lower unemployment.

The Fed might vary the size of its monthly purchases depending on whether the job market is improving and by how much, Bernanke said.

In its policy statement, the Fed noted that the job market has improved, consumer spending and business investment have increased and the housing market has strengthened. But in an updated economic forecast released last week, the Fed said it still did not expect unemployment to reach 6.5 percent until 2015.

The Fed's economic projections showed that 13 Fed officials still think the first Fed rate increase will not occur until 2015. That was the same number as in December. One Fed official thinks the first boost in the short-term lending rate won't occur until 2016.

 

 
 


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