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The head of the Federal Reserve Bank is defending his effort to stoke the economy. The Fed's policy of buying up Treasury securities to push down interest rates is known as quantitative easing. That program has been criticized by some economists and foreign leaders, who say it will do more harm than good.
NPR's Jim Zarroli reports on one of the criticisms, and how Fed Chairman Ben Bernanke responded on "60 Minutes" last night.
JIM ZARROLI: At one point in the interview, Bernanke said he wanted to address something he's been hearing a lot lately.
Dr. BEN BERNANKE (Chairman, Federal Reserve): One myth thats out there is that what we're doing is printing money. We're not printing money.
ZARROLI: The charge goes to the heart of the Fed's efforts to contain the financial crisis. And economist Brian Bethune, of IHS Global Insight, says it's one of the big reasons why the Fed seems to be losing the public relations war.
Mr. BRIAN BETHUNE (Chief Economist, IHS Global Insight): This is something that unfortunately at this point, the Fed is not doing a good job of communicating this.
ZARROLI: At the start of this downturn, the Fed tried to stimulate growth by cutting short-term interest rates it controls directly. But rates fell about as low as they could go, and the recession continued.
This fall, with the recession supposedly over but unemployment still high, the Fed turned to quantitative easing. Under the program, the Fed is buying up U.S. Treasury securities. By flooding the Treasury markets with money, Bethune says the Fed wants to bring down long-term interest rates. That improves the balance sheets of businesses, and makes credit cheaper for consumers.
Mr. BETHUNE: They're raising the net worth of businesses and households, which raises their creditworthiness, which then means at some point, banks will want to lend to them again.
ZARROLI: But the program is expensive. The Fed has pledged to pour more than $600 billion into the Treasury markets, and that has led to the charge that the Fed is printing money.
Where does the Fed get the money it's spending? Bethune says it's simple: It writes a check. The money goes into banks across the country, and appears as reserves on their balance sheets. But Bethune says until the bank actually uses the money, it's not real cash.
Mr. BETHUNE: The only way that that would translate into a general increase in cash in the economy is if they say: We're going to start to do more lending.
ZARROLI: At some point, the economy will pick up, and banks will suddenly realize they have huge amounts of reserves to invest and lend. And that will be a potentially dangerous time for the economy. With so much money flooding into the system all at once, inflation could skyrocket.
Bernanke says inflationary pressures are so low right now, there's virtually no chance of that happening. And anyway, he says, once inflation becomes a threat, it will be easy enough for the Fed to reverse course.
Mr. BERNANKE: We could raise interest rates in 15 minutes, if we have to. So there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation at the appropriate time.
ZARROLI: But Alan Reynolds, a senior fellow at the Cato Institute, isn't so sure the Fed will be able to gain control of the situation, or whether it will have the political will to raise rates as much as necessary.
Mr. ALAN REYNOLDS (Senior Fellow, Cato Institute): I consider it kind of a risky gamble. And so far, it hasn't paid off because the market is scared of it. And as a result, the dollar has gone down, and interest rates have gone up. And that wasn't what they intended, but it is somewhat predictable.
ZARROLI: Reynolds notes that Treasury rates have risen in recent weeks, and he thinks that's because a lot of investors are worried about the impact of quantitative easing. But Bernanke says what critics don't get is that the Fed has no choice but to act.
Mr. BERNANKE: What I think they're doing is, they're looking at some of the risks and uncertainties associated with doing this policy action. What I think they're not doing is looking at the risk of not acting.
ZARROLI: In the interview, he talked about the nation's continuing high unemployment rate. It's a reminder, he says, of just how weak the U.S. economy remains, and how sitting back and hoping for the best is not really an option.
Jim Zarroli, NPR News, New York.
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