What this means is that the Federal Reserve thinks the economic recovery remains fragile. The Fed needs to keep up a maximum effort to get the economy moving – even though some of its actions, if maintained too long, risk awaking an old foe, inflation.
Inflation is beginning to show up in some developing nations such as Brazil, Mr. Bernanke acknowledged. But under questioning from panel chairman Rep. Paul Ryan (R) of Wisconsin, he said the risk of that happening in the United States at the moment is minimal.
“It is always an issue, as you know, Mr. Chairman, that in the recovery period, you have to pick the right moment to begin removing accommodation and taking away the punch bowl,” said Bernanke.
The punch bowl-party analogy for the Federal Reserve is one that often gets mentioned when a Fed chief appears before Congress. It was coined by William McChesney Martin Jr., who served as the nation’s top central banker for five presidents, from 1951 until 1970.
The job of the Fed is to “take away the punch bowl just as the party gets going,” he famously said, referring to the need to raise interest rates when the economy is performing strongly, so that it does not overheat.
But Representative Ryan used a different saying on Wednesday to illustrate his concern that the Fed already may have done too much in the way of monetary stimulus.
“My fear is ... that the cow’s out of the barn ... that we’re going to catch this when it’s too late,” he said.
GOP lawmakers at Wednesday’s hearing criticized the Fed’s effort to get the economy going by buying back government bonds. They fear this “quantitative easing” is just a backdoor way to increase the US money supply, an action that in economic theory leads to inflation if taken too far.
“There is nothing more insidious that a country can do to its people than to debase its currency,” Ryan said.
In response, Bernanke said that recent inflationary spikes in other nations have been driven by the growth in their own economies. Rising gasoline and food prices in the US are driven by increased demand in other nations – something about which the Fed can do little.
The Fed would end the bond-buying program, Bernanke said, when the economy appeared to be growing enough on its own. Using yet another analogy, he likened the Fed to a quarterback who needs to lead his receiver by throwing the ball ahead of him as he runs down the field.
“If the Fed didn’t see this mess coming, will they see the recovery starting in time to turn off the printing presses to stop inflation?” said Rep. Frank Lucas (R) of Oklahoma at a separate hearing Wednesday. “I am not sure their vision in the future will be any better than in the past.”