Jul 14 2011

Shelby: The American People Deserve Transparency, Accountability From the Fed

U.S. Senator Richard Shelby, ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, today made the following statement at a Committee hearing on the Semiannual Monetary Policy Report to the Congress.

Excerpts of Shelby’s statement are immediately below in bold, followed by the full text of his prepared remarks:

“The rise in inflation reveals that the Fed’s most challenging task still likes ahead.

“The failure to adopt a pro-growth economic plan or to restrain federal spending has effectively boxed the Fed into a corner.

“The last thing our weak economy needs right now is an inflation scare.

“Our markets are watching to see if Chairman Bernanke has not only a credible plan, but also the will to take the difficult actions necessary to prevent inflation.  Today’s hearing gives Chairman Bernanke an opportunity to reassure our markets by explaining to the American people how the Fed intends to navigate through this difficult period. 

“More transparency also is needed with regard to how the Fed plans to unwind its record balance sheet… I hope that Chairman Bernanke can shed more light on the options that the Fed is considering and when the Fed will begin this difficult task.

“The Fed still has far to go in opening up, but I hope that Chairman Bernanke will continue his efforts to modernize the Fed’s transparency.  The American people deserve nothing less."

STATEMENT OF SENATOR RICHARD C. SHELBY

Committee on Banking, Housing and Urban Affairs

July 14, 2011

 “Thank you, Mr. Chairman.

“Last month, the Federal Open Market Committee announced the end of its second round of so-called ‘quantitative easing,’ commonly referred to as ‘QE2.’  Chairman Bernanke has claimed that, because of QE2, ‘We no longer have deflation risk.’  The data support his claim.  For example, the 12 month change in the Consumer Price Index, which was 1.1 percent as recently as November, reached 3.6 percent in May. 

“The rise in inflation, however, reveals that the Fed’s most challenging task still lies ahead.  The Federal Reserve’s balance sheet presently stands at about $2.9 trillion, while the federal funds rate has been effectively zero for more than two and a half years.  As a result, the stage is set for a resurgence of inflation if the Fed is not careful.

“The task confronting the Fed is how to unwind its massive balance sheet without sparking more inflation or damaging the economy.  Unfortunately, the dismal performance of our economy and our record federal deficit will make this exceedingly difficult. 

“Chairman Bernanke must also contend with the consequences of the Administration’s economic policies.  The failure to adopt a pro-growth economic plan or to restrain federal spending has effectively boxed the Fed into a corner. 

“If the Fed is to curb inflation, it ultimately has to raise interest rates, but the absence of economic growth will likely make such a move even more painful for the economy.  If the Fed does not raise interest rates, however, higher inflation is almost assured.   Federal borrowing costs could soar, worsening the already severe federal budget crisis. 

“The last thing our weak economy needs right now is an inflation scare.  The economic history of the 1970’s should have taught us that it is far more painful to get inflation under control than it is to keep inflation in check in the first place. 

“History also demonstrates that the Fed’s monetary policy usually remains too loose for too long.  Accordingly, our markets are watching to see if Chairman Bernanke has not only a credible plan, but also the will to take the difficult actions necessary to prevent inflation.  Today’s hearing gives Chairman Bernanke an opportunity to reassure our markets by explaining to the American people how the Fed intends to navigate through this difficult period. 

“During Chairman Bernanke’s last Humphrey-Hawkins testimony, I was pleased that he explicitly stated that the Fed’s price stability target is about 2 percent.  Today, I would like to know more about how the Fed plans to achieve this target.  For example, what is the acceptable range around the 2 percent inflation target?  Does the Fed think that the recent inflation data, which shows inflation above 3 percent, violates its target?   If inflation is above target, how does the Fed plan to reduce it?

“In addition, I would like to know how the ongoing turmoil in the European Union could impact monetary policy.  In particular, will the Euro crisis further constrain the Fed’s ability to maintain price stability? 

“More transparency also is needed with regard to how the Fed plans to unwind its record balance sheet.  Although the FOMC has terminated QE2, it has said that it will maintain its policy of reinvesting principal payments from its existing securities holdings.  Chairman Bernanke’s testimony further indicates that the FOMC may consider another round of quantitative easing if the weak economy continues.  As a result, the Fed’s balance sheet could easily balloon beyond $3 trillion.  It appears that the Fed may be going in the wrong direction.   Recent FOMC minutes, however, indicate that the Fed is developing plans for addressing its balance sheet.  I hope that Chairman Bernanke can shed more light on the options that the Fed is considering and when the Fed will begin this difficult task.

“Finally, I would like to commend Chairman Bernanke on his recent decision to hold press conferences after FOMC meetings.  This is an important step that recognizes that the Fed can no longer make policy behind closed doors.  This is a positive development because the Fed’s policies will be more effective if they are understood—and supported—by the public.  This step also recognizes that the Fed’s history of secrecy is an antiquated practice that simply is incompatible with a free society.  The Fed is a public institution, and the public has the right to expect both transparency and accountability.  The Fed still has far to go in opening up, but I hope that Chairman Bernanke will continue his efforts to modernize the Fed’s transparency.  The American people deserve nothing less.  

“Thank you, Mr. Chairman.”