HIGHLIGHTS-Bernanke's Q&A testimony to Senate panel

Thu Mar 1, 2012 12:20pm EST

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WASHINGTON, March 1 (Reuters) - Below are highlights from the question and answer session of a Senate Banking Committee hearing with Federal Reserve Chairman Ben Bernanke testifying on monetary policy and the U.S. economy.

BERNANKE ON MONEY MARKET MUTUAL FUNDS

"The Federal Reserve in general and I personally would have to agree that there are still some risks in the money market mutual funds, in particular they still could be subject to runs, and one of the implications of Dodd-Frank is that some of the tools that we used in 2008 to arrest the run on the funds are no longer available.

"One approach would be essentially to create some more capital. They have very limited capital at this point, and there might be ways, maybe over time, to build up their capital base. So that is one possible approach and then complementing that as a separate approach would be not allowing investors to withdraw 100 pct immediately.

"I think you have to have some kind of discussion here. Part of the reason that investors invest in money market mutual funds is that they think that they are 100 percent safe. And if that is not true, then we have to make sure that investors are aware and that we take whatever actions are necessary to protect their investments."

BERNANKE ON DOLLAR'S VALUE, INTEREST RATE IMPACT ON OIL PRICES

"There are two ways in which low interest rates policies realistically would affect commodity prices. First would be through weakening the dollar, but the dollar has been pretty stable, really has not moved much since, for example, November 2010 when we introduced QE2. The second is by creating growth, both here and perhaps to some extent internationally, higher growth increases demand for commodities, that raises prices...

"To the extent that monetary policy is structured in a way to increase growth expectations, that feeds into commodity prices through the demand channel. We always keep looking at it but our analysis suggests that the other benefits of low interest rates, through a whole range of asset prices, through increased consumption and investment spending and so on, outweighs reasonable estimates of the effect of that on commodity prices...I think the reason we're seeing these sharp movements has more to do with the international situation than with U.S. monetary policy."

BERNANKE ON NEED TO ELIMINATE PRIMARY DEFICIT

"I would go for, at a minimum, I would aim for the next 10 to 15 years...for eliminating the so-called primary deficit, that is everything except interest payments, because once you eliminate the primary deficit so that current spending incurred and revenues are equal that means that the ratio of your debt to your GDP will stabilize. Then as you go beyond that you start to bring your debt-to-GDP ratio down...Many of the things that can be problems are kicking in after 10 years so I hope Congress will take...a longer-term horizon than that."

BERNANKE ON DUAL MANDATE

"Our monetary policy is aimed at our duel mandate, which is maximum employment and price stability. We're trying to set monetary policy at a setting that will help the economy recover in the context of price stability."

"I think it's interesting that other counties are following our basic approach. It's not because we have coordinated it in any way, it's because they face similar situations: weak recoveries, low inflation, and the fact that interest rates are close to zero."

BERNANKE ON OIL

"In terms of risks to that (recovery), I do have to mention Europe because I think that is important. Another is the oil prices. We have seen a number of movements up and down in energy prices. To some extent a little bit of the movement in commodity prices is essentially inevitable because if the economy is growing and the world economy is growing, the demand for commodities goes up and that is going to create some tendency toward higher commodity prices.

"But when you have shocks to commodity prices arising from geopolitical events and the like, those are unambiguously negative, and they are bad for both households and for the broader economy."

BERNANKE ON HOUSING STABILIZING

"Housing, I think, remains a very difficult area. We are hoping for price stabilization. We think once people have gotten a sense that the housing markets have stabilized, they will be much more willing to buy and the banks will be more willing to lend. But right now there is still uncertainly about where the housing market is going, which I think is troubling."

BERNANKE ON IMPACT OF QE MEASURES, DEFLATION

"If you look back at Quantitative Easing 2, so called, in November 2010, concerns at the time were that it would be a high inflationary environment, it would hurt the dollar, it would not have much effect on growth, etcetera.

"But since November 2010, we have had since then the QE2 and the so-called Operation Twist, we have had about 2-1/2 million jobs created, we have seen big gains in stock prices, we have seen big improvements in credit markets, the dollar is about flat, commodity prices excluding oil are not much changed, inflation is doing well in the sense that we are looking for about a 2 percent inflation rate this year.

"And one other point, in November 2010, we had some concerns about deflation, and I think we have sort of gotten rid of those and brought ourselves back to a more stable inflation environment as well."

BERNANKE ON EUROPEAN CONCERN ABOUT VOLCKER RULE

"The issue that the Europeans and the Canadians and the Japanese and others have raised is that because there is an exception for U.S. Treasuries but not for foreign sovereigns in the Volcker rule, they believe they're being discriminated against and that the Volcker rule might affect the liquidity and effectiveness of their sovereign debt markets. We take this very seriously, we're in close discussion with those counterparts and of course we will be looking carefully to see if changes are needed. We'll do what's necessary."

BERNANKE ON U.S. BANKS' EUROPEAN EXPOSURE

"Our sense is that the direct exposures of U.S. banks to sovereign debt in Europe, particularly that of the weaker countries, is quite limited and is well hedged and that those hedges in turn are pretty good hedges - that the counterparties are diversified and financially strong. If you look at it more broadly, of course, our banks are exposed to European companies and banks, inevitably, they are major trading partners and major financial partners, and again they've been working hard to provide adequate hedges.

"But let me just say I think it is very important to note that if there is a major financial problem in Europe, there will be so many different channels on which that will affect our financial system that I would not want to take too much comfort from that."

BERNANKE ON FISCAL PATH

"The United States is on an unsustainable fiscal path looking out over the next couple of decades. If we continue along that path, eventually we will face a fiscal and financial crisis that will be very bad for growth and sustainability."

BERNANKE ON POTENTIAL GROWTH

"We do not see at this point that the very severe recession has permanently affected the growth potential of the U.S. economy, although we continue to monitor productivity gains and the like. But one concern we do have, of course, is the fact that more than 40 percent of the unemployed have been unemployed for six months or more. Those folks are either leaving the labor force or having their skills eroded. Although we haven't seen much sign of it yet, if that situation persists for much longer then that will reduce the human capital that is part of our growth process going forward. "

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