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US defends loose monetary policy despite European criticism

At a conference in Frankfurt, US central bank chief Ben Bernanke hit out at European critics of the latest tranche of the Federal Reserve's bond-buying program, which he insisted, will help the flagging US economy.

rolls of steel in factory

The weaker the dollar, the more German exports suffer

The chairman of the US Federal Reserve, Ben Bernanke, has defended the bank's latest move to revive the US economy with a $600 billion bond-buyback program, which critics say indirectly devalues the US dollar.

Speaking at a conference in Frankfurt, Germany, he said that "the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar as well as support the global recovery, is through policies that lead to the resumption of robust growth."

Contentious policies

The Fed announced the bond-buyback program, a practice known as quantitative easing, on November 3. Germany and France were quick to condemn the move, German Finance Minister Wolfgang Schaeuble even called the policy "clueless" and "risky".

Fed chief Ben Bernanke

Bernanke's monetary policy has drawn criticism at home and abroad

"The policies of the US central bank exacerbate the insecurities in the global economy," Schaeuble told the news magazine Der Spiegel at the beginning of November.

Economics Minister Rainer Bruederle accused the Fed of protectionist tendencies by "indirectly manipulating" the US dollar's exchange rates with other major currencies.

The fear in Europe is that another bout of quantitative easing in the US, which is designed to flood the markets with cheap money, will devalue the dollar against the euro. Germany, the world's number two exporter, is especially concerned about the effect of a weak dollar on its exports.

Quantitative easing is considered the last resort of monetary policy, when interest rates are zero or close to zero, with the economy stuck in a rut. The idea is that the central bank buys back sovereign bonds and other government papers to allow banks, insurance companies and pension funds to use the money from the sale for loans to businesses for example.

Critics like Germany's Schaeuble point out that the excess liquidity caused by quantitative easing bears the risk of stoking inflation and causing another asset bubble.

Some say the US is being hyprocritical by accusing China of keeping its currency artificially low against the US dollar, while at the same time weakening the dollar indirectly through its policies.

Bernanke, however, said the policies are right in light of sluggish US growth, extremely low inflation and an unemployment rate stuck at a stubbornly high 10 percent.

Author: Nicole Goebel (Reuters, dpa, AFP)
Editor: Rob Turner

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