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""Federal Reserve"":http://www.federalreserve.gov/ Chairman Ben Bernanke underscored benefits of the Fed's quantitative easing policy while also pointing to associated costs and risks in his written ""testimony"":http://www.federalreserve.gov/newsevents/testimony/bernanke20130226a.htm to Senators Tuesday.
[IMAGE]Bernanke began his testimony by assessing current economic conditions. Despite gains in employment, he described the job market as ""generally weak.""
""With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve's mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy,"" he explained.
One ""accommodative"" policy is the Fed's large-scale purchases of longer-term securities meant to support economic growth by keeping longer-term interest rates low.
Currently, the Fed purchases $40 billion in agency mortgage-backed securities each month and another $45 billion in longer-term Treasury securities on a monthly basis.
These purchases, as indicated by the Federal Open Market Committee (FOMC), will continue until there is ""a substantial improvement in the outlook for the labor market in a context of price stability,"" Bernanke said.
Although the plan is to continue, Bernanke says FOMC assesses asset purchases within a ""cost-benefit framework.""
[COLUMN_BREAK]According to Bernanke, the benefits of the purchases and policy accommodation are clear.
""Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC's 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods,"" Bernanke said.
Still, there are several potential risks involved, one of which is the possibility of rising inflation.
""For example, if further expansion of the Federal Reserve's balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC's price-stability objective at risk,"" he said.
Another concern is the possibility low interest rates could over time ""impair financial stability"" if portfolio managers become dissatisfied with low returns and respond by taking on more risk.
While certain types of risk-taking might occur, Bernanke added in some ways, risk is reduced by ""encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses.""
Another concern is that as the economy continues to strengthen, remittances to Treasury, which have tripled in recent years, according to Bernanke, will decline as policy accommodation is reduced.
Bernanke also addressed challenges of reducing the federal budget and warned of the potential impact of automatic spending cuts scheduled March 1.
""[A] substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery,"" he said.
Bernanke advised, ""replacing sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.""
