New Federal Reserve Chairman Ben Bernanke refused Thursday to get pinned down on just how much higher interest rates will need to go to keep the economy and inflation on an even keel.
“There are two possible mistakes. One is to go on too long and one is not to go on long enough,” Bernanke said during a Senate Banking Committee hearing. “And, it’s a very difficult balancing act.”
The comments came as Sen. Jim Bunning, R-Ky., worried that the Federal Reserve could push up interest rates too high and push the economy into a recession — something the central bank has been blamed for at various times in its history.
Repeating a statement made Wednesday before the House Financial Services Committee, Bernanke said he agreed with an assessment made by his Federal Reserve colleagues in late January — while Alan Greenspan was still chairman — that interest rates would probably need to move higher.
Bernanke, who took over the Fed helm on Feb. 1, will have the next word on interest rates on March 27-28 — his first meeting as Fed chief.
Economists predict the Fed will boost rates by another quarter percentage point to 4.75 percent at that time. This would mark the 15th increase of that size since the Fed began to tighten credit in June 2004.
Although economists — and Fed officials — disagree on how many more rate increases may be coming, most agree that the Fed’s rate-raising campaign is drawing to a close.
If the Fed waits too long to end its campaign, the economy could be crippled. If it stops too soon, inflation could get out of control.
On other matters, Bernanke said he would like to see China make progress on a more flexible currency system.
“I agreed they need to do more,” he told Sen. Chuck Schumer, D-N.Y. “I appreciate your frustration senator.”
The matter is of keen importance to U.S. manufacturers who contend that Beijing is keeping its currency artificially low to win an unfair trade advantage.
Manufacturers contend that is hurting U.S. exports and contributing to the loss of U.S. factory jobs. The United States racked up a $201.6 billion trade deficit with China last year, the highest deficit ever recorded with any country.
Bernanke made his debut before Congress on Wednesday when he delivered his first economic report to the House Financial Services Committee.
In that appearance, Bernanke handled himself like the economics professor he used to be before coming to Washington in 2002.
He methodically fielded questions on diverse subjects from lawmakers who frequently mentioned that they liked his plainspoken manner — in contrast to the Delphic discourse of Greenspan, his predecessor.
“We’re going to miss Mr. Greenspan. No one talks like him, and we don’t want you to,” joked Rep. Maxine Waters, D-Calif.
At the same time, Bernanke refrained from making specific recommendations about how Congress should handle such politically charged matters as taxes and spending, bloated budget deficits and how to financially shore up Social Security and Medicare programs for future generations. Democrats and Republicans — for different reasons — wanted him to weigh in with specifics on these matters.
“Welcome to your new role. Probably this will be the most entertaining session you’ll ever have with this committee, so enjoy it,” said Rep. Paul Kanjorski, D-Pa.
Delivering the Fed’s economic report Wednesday, Bernanke said the economy is now flashing good growth signs after lingering fallout from the Gulf Coast hurricanes and high energy prices made for lethargic economic activity in the final quarter of last year.
Recent barometers showing unemployment dropping to a 4½-year low, production humming and cash registers ringing in January suggests that the economic expansion “remains on track,” Bernanke said.
The Fed expects the economy to grow this year by about 3.5 percent, a healthy pace.
Inflation, though, remains a risk, he said.
Decisions on the future course of interest rates will depend more heavily on what upcoming reports say about economic activity and inflation, Bernanke said.
At the Fed’s last meeting in January, then-Fed chairman Greenspan’s last piece of business was to boost a key interest rate to 4.50 percent, the highest in nearly five years to fend off inflation. It marked the 14th increase since the Fed began to tighten credit in June 2004.
Besides energy prices, the Fed also will closely monitor the housing market. Bernanke and others expect a modest slowdown, but a dramatic shift would spell trouble for the overall economy.
“A leveling out or a modest softening of housing activity seems more likely than a sharp contraction, although uncertainty attends the outlook for home prices and construction,” Bernanke said. “Prices and construction could decelerate more rapidly than currently seems likely.”
Other challenges to the economy are posed by the mammoth budget and trade deficits, which Bernanke would like to see trimmed.
Critiquing Bernanke’s performance, Gregory Miller, chief economist at SunTrust Banks, observed: “He is very confident in what he knows and deliberate in the way he presents it — but not the least bit overbearing. He was significantly less convoluted than Greenspan.”
Rep. Michael Oxley, R-Ohio, chairman of the House committee, reminded Bernanke — in case he forgot: “The press and the markets will focus on your every word and gesture.”