Andrew Harrer - BLOOMBERG NEWS
Fed Chairman Ben Bernanke told a House committee Thursday the economy has shown signs of improvement, but it remains vulnerable to shocks.
WASHINGTON -- Congressional Republicans criticized the Federal Reserve on Thursday for working to reduce unemployment and revive the housing market rather than maintaining a single-minded focus on inflation.
The Fed's chairman, Ben Bernanke, was sharply questioned by members of a House committee about the Fed's announcement last week that it planned to hold short-term interest rates near zero until late 2014, a measure that the Fed described as necessary to support a faster pace of economic recovery.
"I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar," said Rep. Paul Ryan, R-Wis., chairman of the House Committee on the Budget. "The prospect of all three is adding to uncertainty and holding our economy back."
Bernanke was calm and careful in his responses, but he did not back down. He told the committee that the economy, and the housing market in particular, would need help for years to come from the Fed and Congress.
Bernanke repeated the Fed's assessment, released last week, that the pace of growth would increase modestly this year, but that the economy still faced significant challenges, including the depressed state of the housing market and the risk that problems in Europe would infect the rest of the world.
In his testimony, Bernanke urged Congress in particular to confront "the urgent issue of fiscal sustainability" by enacting a plan to reduce the federal debt.
Bernanke repeated his familiar caution that Congress should not cut spending or raise taxes too quickly, because doing so could undermine the economic recovery, but said that a credible plan to make such changes in the long term could spur growth by improving the confidence of businesses and consumers.
The hearing was the latest opportunity for Republicans to vent their frustration with the Fed chairman, also a Republican, who in their view is undermining the nation's long-term financial health in his efforts to spur a short-term recovery.
Congress has charged the Fed with two goals, maintaining price stability and maximizing employment; Republicans are concerned that the Fed's huge efforts to spur job growth will eventually result in unmanageable inflation.
These concerns were heightened last week by the Fed's publication for the first time of a formal interpretation of its congressional mandate. The Fed said it would seek to keep annual inflation to 2 percent and to limit unemployment as much as possible, and sometimes one goal would be a priority over the other.
