Federal Reserve Chairman Ben Bernanke issued a warning about China's currency policies while defending a U.S. bond-purchasing plan that some leaders call clueless. The fed chief made the comments at a meeting of central bankers in Germany.
The strategy of pumping billions of dollars into government bonds to spur the U.S. economy has drawn sharp criticism around the world - most recently from G20 finance ministers who called the U.S. Federal Reserve policy of quantitative easing misguided.
They claim the plan, which essentially allows the US to print money, will flood world markets with cheap dollars and drive other currencies higher.
Not so, says Bernanke, who launched his most forceful defense of the US policy Friday - at a European Central Bank Conference in Frankfurt Germany. "The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in the context of price stability in the United States," he said.
In other words, a strong global recovery requires a healthy U.S. economy.
With Congress reluctant to provide more stimulus to bolster the U.S. economy, the bond purchasing plan is one of the few options left for the central bank to lower interest rates. "On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society we should find that outcome unacceptable," Bernanke said.
Critics say the fed policy promotes inflation, lowers the value of the dollar and makes U.S. exports cheaper. But with emerging markets returning to pre-crisis levels faster than developed nations, Bernanke said polices to rebalance the global economy are necessary.
He also spoke out against countries that deliberately keep their currencies weak, without mentioning China. "Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals," said the central bank chief.
Bernanke's comments come days after a congressional report urged Washington to do more to force China to increase the value of its currency. The U.S. believes Beijing deliberately weakens the yuan to make Chinese exports cheaper.