November 19, 2010 8:02 pm

Bernanke answers critics at home and abroad

Ben Bernanke, chairman of the US Federal Reserve, had the last word at the end of a tumultuous week in which the central bank took on its critics at home and abroad.

Speaking at a European Central Bank conference at the grand Frankfurter Hof hotel in Germany’s financial capital, the Fed chairman told China and other developing countries that the problem was their currency manipulation, and not the Fed’s new $600bn round of asset purchases.

“Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals,” said Mr Bernanke.

The conference marked a return to civility after attacks on Fed policy by politicians from Germany to Brazil, who dislike the dollar weakening caused by the Fed’s efforts to stimulate the US economy.

Jean-Claude Trichet, the ECB president, introduced the Fed chairman as “a great member of the brotherhood of central bankers”. But there was less evidence that exporters worldwide are ready to accept Mr Bernanke’s message that they need to reduce their current-account surpluses in order to transfer demand to the struggling US economy.

Mr Trichet said failure to solve global imbalances would “pave the way for future major difficulties”. Dominique Strauss-Kahn, managing director of the International Monetary Fund, said it was understood that “the bigger you become, the more responsibility you get and you cannot go on being a free rider” – in what seemed a clear reference to China.

But Mr Trichet also said: “We strongly share the view that a solid, strong dollar vis-à-vis the other major floating currency ... is very important.”

Diane Swonk, chief economist at Mesirow Financial in Chicago, said: “Rebalancing is difficult. It means the rest of the world can’t rely on us any more to absorb their exports.”

Mr Bernanke joined a counter-offensive against Republicans in Congress who have politicised the Fed’s decision to an extent unseen since Paul Volcker, one of his predecessors, tackled inflation with high interest rates in the 1980s.

“[QE2] could result both in hard-to-control, long-term inflation and ... generate artificial asset bubbles that could cause further economic disruptions,” the Republican leadership in the Senate and House wrote this week.

By way of reply, Mr Bernanke toured Capitol Hill; high-ranking Fed officials such as William Dudley, president of the New York Fed, gave speeches and interviews; while former Fed governors such as Donald Kohn published columns defending the policy.

“They are saying that we’re doing this for a reason – for sound economic reasons – and we’re going to continue,” said Roberto Perli, analyst at the research group ISI in Washington.

The Fed’s case was boosted by weak US inflation data. Core consumer price inflation, excluding volatile food and energy prices, rose by only 0.6 per cent on the previous year in October – the lowest since records began in 1957.

“Not only is the data getting dangerously close to zero – but the trend is in the wrong direction,” said Ms Swonk.

Mr Bernanke said: “The US runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable.”

He delivered a cautious riposte to Congress. “A fiscal programme that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”

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