Barney Frank: The Fed is Overly Concerned about Inflation

An interview with Barney Frank on the economy and Federal Reserve policy:

With economic fairness for all, MarketPlace:

KAI RYSSDAL: They weren't just debating the war on Capitol Hill today, there were also hearings on the state of the economy. Fed Chairman Ben Bernanke ... said inflation looks like it will weaken, and numbers out today on wholesale prices backed them up. But the House Financial Services Committee was after ... balanced economic growth with social fairness. We gave Congressman Barney Frank a call. He's a Democrat from Massachusetts and the chairman of the House Financial Services Committee. ...

If you look at the numbers, sir, if you just look at unemployment, and inflation, and gross domestic product, the economy seems to not be doing so badly. Why do you feel the need for this conversation now?

FRANK: Well, because the economy and the people in the economy are not identical. Then, we have this problem with even President Bush acknowledged last week that inequality has been increasing. Now, inequality is necessary in the capital system. It performs a lot of important functions. But the problem has been that the real wages, take home pay for the average worker, and I'm talking about the great majority of workers, has been somewhat negative. It's actually declined a little bit. We have a good Gross Domestic Product. But it has unfortunately . . . the increase has gone disproportionate to a very small number of people.

RYSSDAL: Just to make sure I understand, it seems to me you're making sort of a moral argument here...

FRANK: Oh, yeah. It's a moral argument to me that, I think, it is wrong to have a situation in which people work very hard because of the circumstances, legally and otherwise, in which they find themselves don't get increases. I think that there's a moral problem here. But it also becomes a political problem. We're in gridlock now. What's happened now is that, that the average citizen has said, look, don't come to me and tell me you want a trade bill. Don't come to me and tell me that I should support a more generous immigration policy from the standpoint of letting people in because I think I'm getting hurt by it. People who want to see trade promotion authority expanded. People who want to see an immigration bill of the sort the President talked about, and want to see no obstacles to the implementation of technology must understand that as long as we have these obstacles to fair treatment for working people, the political system won't allow it.

RYSSDAL: Are you ready to try to deny things to the president, like fast-track and like an immigration bill, if he doesn't, at least listen to your argument?

FRANK: Yes and no. I certainly am prepared to deny him fast-track and the trade bills. On other areas, like immigration, I am supportive of the Administration position. But until we do something about this anger, I'm afraid it won't be successful.

RYSSDAL: Let me get back to your hearings for just a second. I spent some time watching you and Fed Chairman Ben Bernanke on C-Span. You seemed to spend a lot of time on inflation and the Fed's policy on interest rates. It seem to me you didn't really buy Mr. Bernanke's arguments about the way the economy is headed.

FRANK: Well, I think that there is a bias there to focus on the potential danger of inflation, while ignoring the very real current danger of inequality. Now, he's acknowledged inequality, and I appreciate that. And that's a real advance. I mean, you don't generally get that from a Republican-appointed chairman of the Federal Reserve. But I was quoting his own monetary report. He said, first of all, in the monetary report, production is below the economy's potential, and we'll stay that way for a few quarters. And we'll probably get up to potential, but not above it.

FRANK: Secondly, he said, inflation seems to be under control. Reading those two, I'm then surprised to turn the page and see them say, And therefore, our major concern is to worry about inflation happening. And if you focus excessively on the possibility of inflation, even when there is no real indication of it, then you are inclined to do things that make it harder to reach the full economic potential. And I do think growth alone doesn't provide the kind of equity I'd like to see. But the absence of growth guarantees that we won't have it.

RYSSDAL: Barney Frank, Democrat of Massachusetts, chairman of the House Financial Services Committee. Congressman, thanks for your time.

FRANK: Thank you.

When presented with this, here's how Bernanke responded:

Bernanke, Sparring With Frank, Says Fed May Lift Rate, by Vivien Lou Chen and Craig Torres, Bloomberg: Federal Reserve Chairman Ben S. Bernanke, in his first clash with the Democratic-controlled House of Representatives, signaled the central bank will need to raise interest rates if inflation accelerates.

Bernanke sparred with House Financial Services Committee Chairman Barney Frank of Massachusetts, who said it was ''troubling'' the Fed chief was biased toward raising rates even while forecasting only moderate growth. Frank said he didn't understand why inflation was the main concern and wanted to be ''kept involved'' with the Fed's decision-making.

''If inflation becomes higher for some reason, then the Federal Reserve would have to respond to it,'' Bernanke said ... in response to Frank's questioning...

''We have had a period where inflation has been above where we'd like to see it as far as consistency where price stability is concerned,'' the Fed chairman said. ''In order for this to continue in a sustainable way, inflation needs to be well- controlled.'' ...

Frank said the question for the Fed should be whether it will consider lowering rates, not raising them, because the economy is expanding below its ''potential.'' ...

There are theoretical reasons to believe that responding more forcefully to increases in inflation stabilizes output and employment in the long-run. While allowing some inflation today may increase employment presently, and hence be politically attractive, the costs of eliminating the inflation later can be even larger and the Fed is, I believe, correct to resist letting inflation begin drifting upward once again. If output growth weakens considerably, the story changes, but for now a policy of holding the federal funds rate steady is difficult to criticize.