Bernanke Takes Aim at China

By JON HILSENRATH

Federal Reserve Chairman Ben Bernanke is firing back amid criticism at home and abroad of the Fed's easy-money policies, arguing that China and others are causing global problems by preventing their currencies from strengthening as their economies boom.

By keeping their currencies artificially weak, Mr. Bernanke argues in remarks prepared for delivery in Frankfurt Friday, China and other emerging markets are allowing their economies to overheat, preventing trade imbalances from adjusting and worsening what he called a "two-speed" global recovery.

Their "strategy of currency undervaluation" is preventing more "balanced and sustainable" global growth, he warns, echoing a view expressed by Obama Administration officials.

Mr. Bernanke has come under attack for the Fed's decision to purchase $600 billion in U.S. Treasury bonds in an effort to drive down long-term interest rates. Critics in the U.S say it could cause inflation. Critics abroad say the flood of dollars that the Fed is effectively printing to finance its bond purchases is pouring into overseas markets and could cause asset bubbles.

Some also have accused the Fed of trying to weaken the dollar to spur U.S. exports.

Fed officials have denied that is their goal, though Mr. Bernanke effectively acknowledged the U.S. currency should weaken against currencies in emerging markets, because their economies are growing so much faster than economies in the developed world.

The Fed chairman's message, though scholarly in tone, was unusually blunt in laying blame for inflationary pressures in emerging markets and for tensions over currencies on countries like China. A chart accompanying his comments also pinpoints Taiwan, Singapore and Thailand as aggressively trying to hold their currencies down, while India, Chile and Turkey aren't.

"Why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals?" Mr. Bernanke asks. Mainly, he says, because they are sticking to a long-term strategy of pushing for export-led growth with cheap exchange rates.

Central banks manage exchange rates by intervening in currency markets. As dollars flood into their economies from exports, the central banks use the dollars to purchase assets like U.S. Treasury bonds rather than allowing those dollars to be exchanged freely for domestic currencies. That keeps the domestic currencies from rising in value.

Mr. Bernanke notes that in preventing the yuan from appreciating, China has accumulated a massive $2.6 trillion stock of foreign-currency reserves. Most of that is in U.S.-dollar assets. An alternate risk for the U.S.: If China sells its U.S. bonds, it could push down their value and push up U.S. interest rates.

Mr. Bernanke also makes his case against domestic critics, arguing that U.S. unemployment could keep rising without action by the Fed and that inflation is too low and could fall further.

Though critics say inflation could soar because of the Fed's actions, Mr. Bernanke says it is around 1%, is likely to be "quite subdued" for a long time and that he is committed to allowing it to go no higher than 2%.

"On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for years," Mr. Bernanke warns. "As a society, we should find that outcome unacceptable."

Mr. Bernanke got a voice of support Thursday from Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis. In comments in Chicago he supported the Fed's easing program, describing it as "a move in the right direction," though he had expressed some skepticism about the program in the past. He and Mr. Bernanke said the program wasn't a cure-all. (FONTE: Wall Street Journal)