Bernanke's Congressional Testimony: Exit Strategy, Independence, Fiscal Policy (and Politics)

Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee yesterday and Senate Banking today. There are varying takes on his testimony, but there seem to be three important themes that many have picked out for policy going forward:

1) The Fed has an exit strategy – Bernanke chose to not only testify about this, but also to write a reassuringly worded op-ed in the Wall Street Journal:

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.

As the New York Times' Catherine Rampell writes, the question, more then just the how, is the when. James Kwak at the Baseline Scenario agrees that the "when" is important and has a solid take on the Fed's actions and Bernanke's words to this point.

2) The Fed should retain it’s independence – amidst Ron Paul led efforts to audit the Fed, Bernanke defended the Fed’s actions to this point and pointed out a number of concerns about Paul's proposal noting that:

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations.

With the profile of the Fed's activities at a high level of public attention, it’s not particularly surprising that the Fed's independence is being challenged. The creation of independent commissions is always politically difficult – who likes to give up their power? (Part of the reason the IMAC development on healthcare is fairly impressive.)

In Mark Thoma's view, the Fed's independence should not be diminished, but the district banks' presidents should be selected differently. He also brings in some good history on the topic.

3) Lawmakers should reign in long-run deficits – Not too much to expound on this point (Bernanke didn't go into too much detail, aside from touching healthcare costs), but the point is that fiscal policy gone awry in the long-run can create tremendous problems in the conduct of sound monetary policy – not something a Fed chair is particularly interested in seeing. Noam Scheiber writes that Republicans either don't know or don't care about the difference between the long-run and the short-run.

Of course, this testimony comes amidst the beginnings of the discussion about whether Bernanke is to remain Fed Chair (his term ends in January). The coming months will tell how the head of the nation's independent central bank plays his politics. Apparently he's got solid instincts on the retail side.