FRANKFURT, (Reuters) – Federal Reserve Chairman Ben Bernanke hit back on Friday at critics of the U.S. central bank’s bond-buying program and issued a thinly veiled attack on China’s policy of keeping its currency on a leash.
Bernanke, facing a chorus of protests about the asset-buying spree from within and outside the central bank, said a more vigorous U.S. economy was essential to fuel the global recovery and dismissed charges he was debasing the dollar.
“The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke told a conference at the European Central Bank in Frankfurt.
The Fed’s November 3 decision to buy a further $600 billion (£376 billion) in U.S. government debt with new money generated outrage among policymakers in many nations, who accused the United States of seeking to weaken the dollar to gain an export edge.
German Finance Minister Wolfgang Schaeuble called the policy “clueless,” while domestic critics have argued the policy could ignite inflation and fuel asset bubbles.
Fed officials have circled their wagons to defend the program with an unusual campaign of public remarks. Bernanke went so far as to brief lawmakers on Wednesday behind closed doors.
In his remarks on Friday, Bernanke faulted inflexible currencies for blocking a needed rebalancing of global growth, but admitted a need for greater U.S. saving as well.
“Deficits and surpluses are generated by many countries’ behaviour not a single currency,” Bernanke said during a panel discussion with IMF Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.
“It will be very difficult for exchange rates by themselves to restore the balance and so I think structural adjustments on both sides are necessary,” Bernanke said.
Strauss-Kahn said he too recognized the difficulties involved but said global imbalances could not be tackled without “important changes in the relative values in the currencies.”
“We need to move in that direction,” he said.
Addressing international criticism of the Fed’s action, Bernanke said much of the recent weakness of the dollar reflected an unwinding of the increases that were notched as investors fled to the safety of the greenback during the European sovereign debt crisis in the spring.
Still, analysts said Bernanke’s emphasis on the need to reinvigorate the U.S. economy was a dollar negative.
“It is hard enough to stop a central bank from weakening its currency when it is cutting rates, but when it is willing to print money to do so … it looks very much as if they see a weaker currency if not as the sole target of monetary policy, then as something that is natural, if not inevitable,” analysts at Citibank said in a research note.
Many emerging economies have worried that volatile investment inflows sparked by the dollar’s decline could be destabilizing — either fuelling inflation or asset bubbles.
Bernanke said the failure of some emerging market economies with trade surpluses to allow their currencies to appreciate was making the problems those countries face worse.
“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” he said.
While Bernanke did not explicitly point to China, U.S. officials have long argued that an undervalued Chinese yuan gives the Asian export powerhouse an unfair advantage.
Bernanke said inflexible currencies were preventing a needed rebalancing of global growth and could end up destabilizing the world economy.
“For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account,” he said.
Michael Feroli, an economist with JPMorgan Chase in New York said Bernanke’s forceful words carried a message for domestic and international critics alike.
“The essence of the chairman’s argument is that the market will resolve undervalued Asian currencies in one of two ways: either an increase in the price level in Asia, or a decrease in the price level in the U.S.,” he said.
“Without an aggressive Fed response, the U.S. runs a greater risk of deflation and U.S. monetary policy would in part be abdicated to Asian policymakers.”
Bernanke said sluggish U.S. growth, falling inflation and an unemployment rate that has hovered near 10 percent for months convinced Fed policymakers they needed to pump in more stimulus.
“On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that unacceptable.”
Bernanke said a fiscal program that combined near-term measures to enhance growth and steps to address long-range deficits would be an important complement to Fed policies.
But whether Republicans – who seized control of the U.S. House of Representatives in November elections on a platform of fiscal restrain – will cooperate is questionable. Many Republican lawmakers have lashed out at the Fed for risking inflation.