AUDIE CORNISH, HOST:
From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.
MELISSA BLOCK, HOST:
And I'm Melissa Block.
Some reassurance today for investors who worried the Federal Reserve might reverse course and start raising interest rates. Today, in testimony on Capitol Hill, Fed Chairman Ben Bernanke gave a full-throated defense of those low rates. They're a centerpiece of the Fed's effort to stimulate the economy.
Bernanke also urged Congress to find an alternative to the automatic spending cuts set to take effect on Friday. He said the cuts will hurt the recovery, as NPR's John Ydstie reports.
JOHN YDSTIE, BYLINE: Testifying before the Senate Banking Committee, Bernanke said the Fed's estimates of the economic effects of the sequester are in line with those of the Congressional Budget office. The CBO says the $85 billion in automatic budget cuts will reduce growth this year by six-tenths of a percent. Bernanke warned that slowdown will be in addition to a 1-and-a-half-point drag on the economy from the $2.5 trillion in tax hikes and budget cuts the president and Congress have already agreed on.
BEN BERNANKE: So in that respect, I think an appropriate balance would be to introduce these cuts more gradually and to compensate with larger and more sustained cuts in the longer run to address our long run fiscal issues.
YDSTIE: The Fed chairman made that last point several times during his testimony, arguing that the immediate spending cuts in the sequester are inappropriate because they'll hurt the recovery and likely add to the deficits in the short-term; when the real problem is the ballooning of budget deficits in a couple of decades when the baby boom retirement peaks.
BERNANKE: You've made progress on the very near term, as far as the budget is concerned. Where the real problem still remains unaddressed is in the longer term. And so, it doesn't quite match to be doing tough policies today, when the real problem is a somewhat longer term problem. That's what I'm trying to suggest.
YDSTIE: Republicans have suggested that the Congress shouldn't stop the sequester but simply re-arrange the indiscriminate, across-the-board cuts to make them more rational. Bernanke said that wouldn't significantly diminish the drag on growth.
The Fed chairman also spent a good deal of time defending the Federal Reserve's stimulus policy. Since the financial crisis, the Fed has tried to boost growth with low interest rates, engineered by its massive purchase of U.S. government and agency bonds - more than $2 trillion dollars' worth.
Critics, even some within the Fed, worry that tactic called quantitative easing could boost inflation, destabilize the financial system and may already be causing a stock market bubble. They've called for an early end to the stimulus. Bernanke responded this way to those concerns.
BERNANKE: While there are things that we really have to pay attention to, at this point they're not of sufficient concern that they outweigh the important benefits of trying to support a continued recovery.
YDSTIE: Republican Senator Tom Coburn of Oklahoma asked Bernanke if the Fed's stimulus might be losing its potency.
SENATOR TOM COBURN REPUBLICAN, OKLAHOMA: Is there a diminishing return on your efforts at quantitative easing?
BERNANKE: That's a good question. We don't know exactly but there's pretty good evidence that three-and-a-half percent mortgage are one of the reasons why housing looks like it's turning; low auto loan rates, one of the reasons why car sales are up. Whether it's bigger or less, I'm not sure but it does seem to be having some positive benefits in terms of growth.
YDSTIE: Bernanke also expressed confidence that the Fed has the tools and ability to safely unwind or sell-off its huge pile of bonds when the economy gets humming again and there's a danger of inflation.
Republican Senator Bob Corker of Tennessee charged that the Fed's low interest rate policy is creating a false economy, punishing seniors and other savers, and risking inflation. Bernanke had this response.
BERNANKE: My inflation record is the best of any Federal Reserve chairman in the post-war period, or at least one of the best - about two percent average inflation. And we're trying to achieve a stronger economy for everybody.
YDSTIE: Bernanke will repeat his testimony on the House side of the Capitol tomorrow.
John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.