Aug. 3 (Bloomberg) -- Nobel Prize-winning economist Gary Becker said he is concerned that Federal Reserve Chairman Ben S. Bernanke may bend to political pressure and fail to raise interest rates quickly enough to contain inflation.
Becker, a University of Chicago professor, warned that there is a “big risk” of inflation as the economy recovers, largely because of the hundreds of billions of dollars in excess reserves that banks have on deposit at the Fed. He said Bernanke “has the tools” to control inflation, by selling Treasury bonds rather than by purchasing them, and by reversing the central bank’s emergency programs expanding credit.
Since March 2008, the Fed has taken steps to combat the credit crisis that included increasing lending to banks, support for the commercial-paper market and a lifeline to insurer American International Group Inc. Bernanke announced in June that the Fed will begin winding down the programs this year, letting a plan expire in October and trimming the size of the Term Auction Facility and Treasuries-lending programs.
“Will he do that if that has a risk of slowing down the recovery? He’ll be under political pressure not to do so, so that’s a big uncertainty,” Becker said in a July 31 interview. “I think he’ll do something, surely to try and control that, but I’m not sure he’ll have the will to do it sharply enough.”
Becker won the Nobel Prize for economics in 1992.
Bernanke said last week in a town hall meeting that he expects inflation to be “quite low” for the next few years, and that the Fed is wary of containing inflation while trying to spur a recovery.
‘Overstimulate’ Economy
“We want to make sure that we don’t overstimulate the economy” and fuel inflation, Bernanke said in the meeting, which aired on PBS television.
Becker said that Bernanke will need to strike a balance between managing inflation and maintaining the emergency credit measures and low interest rates that will give the economy a “boost.”
“The Fed will have to navigate trying to control inflation without putting too much of a crimp on the economy,” he said.
Bernanke has done “a reasonably good job” and should be reappointed when his term expires on Jan. 31, Becker said.
