Bernanke Gives Congress the Scoop–and Fair Warning

Chairman of the Federal Reserve Ben Bernanke is speaking before Congress as we speak, and he’s covering a lot of ground. Major points of Bernanke’s speech include: unemployment is likely to remain high throughout 2010, inflation is likely to remain low in the next few years, and Congress should leave the Fed alone.

Indeed, Bernanke directly confronted the increasing encroachment of Congress into the activities of the Federal Reserve, especially with regard to the Fed’s massive influence on interest rates. Historically, the Fed has been an independent agency, but the recent recession has tested Congress’ ability to let the Fed alone.

Bernanke’s passive-aggressive warning today follows a letter from 150 economists and professors demanding that Congress keep politics out of the Fed. Over the next couple years, as the economy hopefully recovers, the Fed may raise interest rates in order to prevent or control inflation.

But what if Congresspeople, liking the effect that low interest rates are having on the business communities of their districts, decide that now is not the time to raise interest rates?

That scenario is the one worried about by Bernanke and the 150 academics. For depositors concerned about CD interest rates, money market interest rates, and saving account rates, making sure that the Fed has the power to raise interest rates no matter what Congress says is far from academic.

Without the ability to freely raise interest rates regardless of politics, the Fed could lose control of inflation, destroying the real value of saved funds held in deposit accounts.