The chorus of Fed doubters is getting larger – and louder.
It includes not only political conservatives and many investors but now also – famously – German Chancellor Angela Merkel, who said she viewed "with great skepticism" the aggressive moves of the Fed as well as European central banks to buoy up the economy.
These skeptics pose a key question: When and how will the US government wind down its extraordinarily large presence in the US economy?
Return to the '50s
As things stand now, government debt in 2011 will be equal to about 70 percent of the nation's output, up from 40 percent before the financial crisis hit. That would be the highest ratio since the early 1950s, when the US was winding down its huge debts from World War II.
Yes, Fed chairmen are always telling Congress to stop running deficits. The difference is that this time the Fed itself has made stunning and sometimes uncomfortable interventions to stabilize the economy.
Clear – and fuzzy
So when and how will the central bank's "policy accommodation" – Fed-speak for "hand out free money to every lender in sight" – come to an end?
Mr. Bernanke offered some specifics – and some fuzziness.
"For the time being we still need to maintain a strong supportive position in order to help this economy begin its recovery. But as that begins, at some point we're going to need to withdraw the policy accommodation to avoid any inflation down the road," he told lawmakers Wednesday. "It's not going to be an easy call."
Some skeptics wonder whether the Fed has become such a big factor in the economy – its $2.2 trillion balance sheet is more than double its size a year ago – that it will be unable to pull back fast enough.
"My answer is yes," Mr. Bernanke told the committee. Then he outlined why he's optimistic. Many of the Fed's stimulative programs are short-term, anyway. Importantly, the Fed can also raise the interest rates it pays banks for the reserves that it holds. As long as banks can earn more from the Fed than from lending out those reserves, they won't lend them out.
Of course, the Fed wants banks to loan money now to spur the economy. But once recovery comes, too much lending would fan the flames of inflation.
The Fed has other tools to fund its balance sheet outside the banking system, so as not to bloat the money supply, Bernanke said. "If worst came to worst, we could sell some of our assets, but that's not a big part of the plan certainly in the near term."
No immediate miracle
So how long will it take for the US government to unwind its position in the economy?
In some markets, like the commercial paper market, that process is already under way, Bernanke said. "For other parts of the economy, like the TARP [Troubled Asset Relief Program] investment in banks or some longer-term holdings of the Fed, it may take a few more years. But I would say that four or five years from now, I hope that as a government we will be pretty much out of those financial markets and things will be operating on a more normal basis."
That's a long unwind. A lot of unforeseen events can happen in four years.