Bernanke answers to inflation hawks

INDIANAPOLIS, Oct. 1 (UPI) -- U.S. Federal Reserve Chairman Ben Bernanke answered critics Monday, saying the Fed's monetary policies will not lead to inflation.

"No, that's not what is happening and that will not happen," Bernanke said in a speech Monday at the Economic Club of Indiana in Indianapolis.

Bernanke was answering his own question. "I sometimes hear ... by buying securities are you 'monetizing the debt,' printing money for the government to use and will that inevitably lead to higher inflation?"

In the first place, Bernanke said, "we are acquiring Treasury securities on the open market and only on a temporary basis with the goal of supporting the economic recovery through lower interest rates."

When the time is right, the Fed will sell these securities, returning its portfolio to "a more normal size," he said.

"Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system."

Using money it sets aside rather than money it creates means the Fed is not putting more money into circulation, which is so widely assumed that quantitative easing is also called "printing money."

The Fed said in mid-September it would increase its securities purchases through the end of 2012 to a total of $85 billion in purchases per month.

Republican presidential candidate Mitt Romney said the move proved the economy needed help. Others complained that too much liquidity in the marketplace would provide the opportunity for prices to rise.

But Bernanke said increased bank reserves held at the Fed, which was used to make the purchases, "does not necessarily translate into more money or cash in circulation and, indeed, broad measures of the money supply have not grown especially quickly, on balance, over the past few years."

Bernanke also said the central bank had an excellent record on inflation, having kept it near 2 percent "for several decades."

"The Federal Reserve's price stability record is excellent," he said.

But it also requires vigilance, Bernanke noted.

"The key question is whether the Federal Reserve has the policy tools to tighten monetary conditions at the appropriate time so as to prevent the emergence of inflationary pressures down the road," the chairman said.

He then answered his own question again.

"I'm confident that we have the necessary tools to withdraw policy accommodation when needed," he said.