NEW YORK (CNN/Money) -
Federal Reserve Chairman nominee Ben Bernanke vowed to keep up current chief Alan Greenspan's policy of fighting inflation but also said he'd stay committed to keeping employment and economic growth strong.
Bernanke said that even if the Fed followed his long-stated proposal of having a stated inflation goal, known as inflation targeting, it would not have to abandon the Fed's dual mandate of maintaining price stability and striving for full employment.
"I subscribe entirely and wholeheartedly to that dual mandate," he said, in response to questions from Sen. Richard Shelby, R-Ala., the chairman of the Senate Banking Committee that was holding a confirmation hearing on Bernanke's nomination. "I do not subscribe to any rigid or mechanical rule in policy making."
Bernanke said in his prepared comments that he is convinced that stable prices are the best way to keep economic growth strong, and that it's important to low- and middle-income Americans that the Fed stays vigilant on inflation.
"I think it's a false dichotomy," he said when asked to choose between the Fed fighting inflation or giving low rates to spur economic growth and employment. "It's low income people who suffer most from recession. It's also low-income people who suffer most from a high level of inflation."
Bernanke's comments reassured bond traders as Treasury prices rallied and the yield on the 10-year note fell after his prepared comments were released, and then through his testimony.
"Obviously, this reaffirms to the market that he'll be an inflation hawk," said Wachovia Securities economist Jason Schenker. "The discussion of the balance between employment and inflation is standard; he was reaffirming he'll be vigilant on inflation."
Bernanke has long written in favor of inflation targets, which Greenspan has opposed. But Bernanke said he believes having an inflation target is a step in Greenspan's long-stated goal of greater transparency to the markets about upcoming Fed action.
"I believe this is just an incremental step," he said.
Bernanke also promised he would move slowly toward an explicit long-run inflation objective for the Fed if he is confirmed.
"I assure this committee that if I am confirmed, I will take no precipitate steps in the direction of quantifying the definition of long-run price stability," he said.
"This matter requires further study at the Federal Reserve as well as extensive discussion and consultation. I would propose further action only if a consensus can be developed that taking such a step would further enhance the ability of the FOMC to satisfy its dual mandate of achieving both stable prices and maximum sustainable employment," he added, referring to the Federal Open Market Committee, the Fed's policy-making arm.
Schenker said that while Bernanke's promise not to move on targeting without consensus within the FOMC was not a surprise, the assurance is "an important statement."
From the White House
Bernanke has been serving as chairman of the White House Council of Economic Advisors. Before he was nominated last month, he last appeared before a Congressional committee to argue for various Bush administration economic proposals. But he promised he would be independent of the administration if confirmed to the Fed.
"I would bear the critical responsibility of preserving the independent and nonpartisan status of the Federal Reserve -- a status that, in my view, is essential to that institution's ability to function effectively and achieve its mandated objectives," he said in his opening comments.
He would also not be drawn into debate with one of the Democrats on the committee, Sen. Christopher D-Conn., into whether tax cuts and wider federal budget deficits hurt or helped the economy.
"I agree that budget deficits are a problem," he said. "But I'm going to begin now a practice to not make specific recommendations on tax cuts or spending proposals."
That restraint, while perhaps at least partly a function that he faces a confirmation vote, contrasts with Greenspan's recent practice of commenting on a wide range of nonmonetary policies, such as proposals on taxes or Social Security reform.
Still Bernanke's confirmation is expected to be smooth and relatively easy.
Bernanke's comments were also a bit more plain-spoken than Greenspan's typical testimony, which has become famous for being dense and at times confusing. For example, when asked if he was concerned about the amount of U.S. government debt held by foreign governments, he said it was a necessary fact of life given the U.S. trade deficits that need to be financed.
"It's like if you're asking how it feels to be very old, consider the alternative," he joked, before explaining further that given the trade-gap needs to be financed, "we're better off with willing lenders than unwilling lenders. If they were unwilling, interest rates would be higher and the economy would not be as strong."
Answering questions about the current account deficit, Bernanke said the deficit is not simply a product of U.S. economic policies but a complex phenomenon that arises from a global imbalance of savings and investment.
Unwinding the deficit requires more saving on the part of Americans as well as more willingness of U.S. trading partners to rely on domestic spending rather than on exports to spur growth, he said.
Foreign purchases of dollars have helped finance the current account deficit, and Bernanke said there is still broad appetite for dollar assets, both at home and abroad. "I don't expect to see any major shifts in that appetite," he said during the afternoon session.
He also said that while energy prices are a concern for their impact on inflation, there's only so much the Fed can do to keep those prices in check.
"Monetary policy can not create more energy," he said.
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