Bernanke Must Decide When To Raise Interest Rates
RENEE MONTAGNE, host:
President Obama has asked Ben Bernanke to stay on as chairman of the Federal Reserve, and if the Senate goes along, Bernanke will have another four years to help manage the country's economy. To talk about the challenges he would face, we called David Wessel. He's economics editor of The Wall Street Journal, a frequent guest on this program, and joins us now.
Mr. DAVID WESSEL (Economics editor, The Wall Street Journal): Good morning, Renee.
MONTAGNE: The economy looks like it might be possibly improving, certainly stabilizing. What would Bernanke focus on, were he to stay on as Fed chair?
Mr. WESSEL: Well, your forecast is a good one. It's pretty much the one that Ben Bernanke himself has made. His problem now is to decide when is the right moment for him to raise interest rates and pull back some of this credit that he has injected in the economy during the crisis.
If he moves too soon, he risks pushing the economy back into recession. That's something that the Fed did back in 1937 during the Great Depression. He doesn't want to do that. But if he waits too long, he risks an outbreak of inflation that he has vowed to avoid.
He also has, I think, a big challenge in maintaining the Fed independence to make that decision. He's under a lot of criticism from Congress. It's a real vote of affirmation from the president, of course, that's he's being reappointed. But he needs to keep good relations with Congress and defend the Fed to the public so the Fed has the independence that he so greatly values.
MONTAGNE: And the White House just came out with new projections on the federal deficit. It's at $9 trillion over the next decade - enormous deficits, if you go along with the estimate. That's got to be something that people are thinking about. How would Bernanke deal with that?
Mr. WESSEL: Right. It's something that Bernanke really cannot avoid worrying about. For one thing, the global investors now seem willing to lend the U.S. government enormous amounts of money at relatively low interest rates. This year's deficit is going to be higher as a fraction of all the goods and services we produce in the U.S. than at any time since World War II.
As long as the foreign investors keep coming, that's great. If they get sated, Mr. Bernanke may have to cope with the fact that long-term interest rates -which is what they charge us for lending us money - could rise, and that could hurt the economy when it's still weak. Or it could push down the value of the dollar, which could lead to inflation. It could lead Mr. Bernanke to raise interest rates prematurely. Or it could provide a lot of juice for the economy. If things start to come back, he may find that he has to raise rates to slow the economy because there's so much fiscal policy pushing it along.
MONTAGNE: Is it all about reacting, though, for Bernanke? I mean, does he have any influence over the deficits?
Mr. WESSEL: Well, you know, that's a good question. He doesn't directly, of course. Deficits are about taxes and spending. That's the province of the president and the Congress. But in the past, the Fed chairman - especially one who's got a little bit of credibility - has had an enormous amount of influence on Congress.
If he goes up there and testifies in his second term as Fed chairman that you guys really need to do something about this, or if he helps maybe influence the tone of the political debate and says you can't avoid this, that in the past -with Alan Greenspan or with Paul Volcker - has had an influence, and I suspect that'll happen again.
MONTAGNE: And David, what do you make of the nine trillion estimate of future deficits? Is that on the money? Is it an underestimation?
Mr. WESSEL: None of us are very good at forecasting 10 years out, but it could be an underestimate. It depends on guessing what's going to happen to health care costs. It depends on what decisions Congress makes on taxes and spending. And importantly, it depends on what happens to the economy.
If we get an oil price increase or a turn in the stock market or more problems in commercial real estate and the economy gets worse, then that reduces the amount of revenues to the government, increases the amount of spending, and could make this even enormous number look like an underestimate.
MONTAGNE: David, thanks very much.
Mr. WESSEL: You're welcome.
MONTAGNE: David Wessel is economics editor of The Wall Street Journal.