HIGHLIGHTS-Bernanke's Q&A testimony to House panel
WASHINGTON, July 17 (Reuters) - Below are highlights from the question and answer session of a House Financial Services Committee hearing on Wednesday with Federal Reserve Chairman Ben Bernanke testifying on monetary policy and the U.S. economy. BERNANKE ON EFFECTS OF TIGHTENING: "I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank." BERNANKE ON HOW TO PREVENT A SPIKE IN INTEREST RATES: "By communicating, by not surprising people, by letting them know what our plan is and how it relates to the economy. You talked about the weakness of the economy, I think that's evidence that we need to provide continued accommodation even if we begin to change over time the mix of tools that we use in providing that accommodation. You said a lot of correct things about the weakness of our economy. I agree with a lot of what you said but it is the case that we have made some progress since 2009 and many people think of the United States as one of the bright spots in the world, we're doing better than a lot of other industrial countries, and while we're certainly not where we want to be at least we're going in the right direction and we hope to support that." BERNANKE ON EXITING WITHOUT INFLATION: "There have been people saying we are going to have hyper-inflation any day now for quite a while, and inflation is 1 percent. We know how to exit. We know how to do it without inflation. Of course there's always the chance of going too early or too late, and not hitting the sweet spot: that happens all the time whenever monetary policy tightens. We have all the tools we need to exit without any concern about inflation." BERNANKE ON POSSIBLE FAILURE TO LIFT DEBT CEILING: "I think it would be quite disruptive. ... It would be very concerning for financial markets and, I think, for the general public, if the United States didn't pay its bills. I hope very much that that particular issue can be resolved smoothly. I am not claiming in any way that it isn't important to discuss these critical fiscal issues. It is. But to raise the prospect that the government won't pay its bills, including not just its interest on debt but even what it owes to seniors or to veterans or to contractors, is very concerning, and I think it could provide some shock to the economy if it got severely out of hand." BERNANKE ON WHETHER RISE IN RATES IS HURTING ECONOMY: "I think it's a little early to say, so far. I think we need to monitor particularly the housing market to see if there is any impact from higher mortgage rates. ... I haven't seen anything that points strongly to any particular problem, but again it's very early." BERNANKE ON WHETHER MARKETS ARE ADDICTED TO FED POLICY: "Well, the main thing that supports the stock market or other markets is the underlying economy and I would say that, I don't know what it means to say that markets are addicted, I don't think that's really a technical term in finance. The reason I think that markets have improved so much since 2009 is because Fed policy and other policies have succeeded in providing a stronger economy with low inflation." BERNANKE ON LOWER REMITTANCES FROM FED TO TREASURY: "It won't affect our ability to do monetary policy. Independence is up to Congress. In terms of the fiscal impact, we have done very many simulations. There may be a period of very low remittances, but we've already had a period of very high remittances, almost $300 billion in the last four years." BERNANKE ON PART-TIME EMPLOYMENT: "One thing that we hear in the commentary we get at the FOMC is that some employers are hiring part time in order to avoid the (Affordable Care Act) mandate there, so we have heard that. But on the other hand, a couple of observations: One is that the very high level of part-time employment has been around since the beginning of the recovery, and we don't fully understand it. Secondly those data come from the household survey, and they are a little bit inconsistent with some of the data from the firm survey, which suggest that work weeks haven't really declined very much." "So I would say at this point we are withholding judgment on that question." BERNANKE ON FISCAL POLICY AND IMMIGRATION: "Generally we take those decisions as given and we try and figure out what the best thing we can do is given the economic environment we find ourselves in. So with respect to fiscal policy and the restraint this year in fiscal policy we sort of take that as given again and try to figure out how much monetary accommodation is therefore needed. With respect to immigration I think these are much longer term propositions, these are gains and losses over many years and the Fed, because it focuses mostly on short term cyclical movements to the economy, our focus is typically not 10 or 20 years but rather the next few years." BERNANKE ON TOOLS AND ASSET BUBBLES: "We have some tools. The Federal Reserve has recently issued some guidance to banks on leverage lending and other kinds of practices that could contribute to asset bubbles. All that being said, we want to make the financial system as transparent as possible, I don't think we can guarantee that we can prevent any bubble." BERNANKE ON CHINA, JAPAN POLICIES AND FOREIGN EXCHANGE: "China has managed its exchange rate and kept it for many years below its equilibrium level, in order to increase its exports. That's what economists call a zero-sum game; what they gain we lose basically." "The Japanese approach is different. They are not manipulating their exchange rate, they are not directly trying to set their exchange rate at a given level. What they are doing is engaging in strong domestic monetary policy measures, trying to break the deflation they've had for about 15 years, and a side effect of that is that the yen has weakened." "Over time, if they (Japan) do in fact achieve positive inflation, that increase in prices there will partially offset the exchange rate movement." BERNANKE ON STRESS TESTS: "Stress test has a different purpose for the Fed, which is to effect how much remittances we send to the Treasury and we have done various stress tests in that respect and many of them are publicly available, we have a number of research papers and there are also outside research with the IMF and others who have done these tests. The bottom line is that for any reasonable interest rate path this is going to end up being a profitable policy for the taxpayer." BERNANKE ON ACCOMMODATIVE POLICY, ASSET PURCHASES: "Our intention is to keep monetary policy highly accommodative for the foreseeable future, and the reason that's necessary is because inflation is below our target and unemployment is still quite high. In terms of asset purchases, though, I've been very clear that we're going to be responding to the data. And if that data are stronger than we expect, we'll move more quickly, at the same time maintaining the accommodation through rate policy. If the data are less strong, if they don't meet the kinds of expectations we have about where the economy is going, then we would delay that process, or even potentially increase purchases for a time." "So we intend to be very responsive to incoming data, both in terms of our asset purchases - but it's also important to understand that our overall policy, including our rate policy, is going to remain highly accommodative." BERNANKE ON TOO BIG TO FAIL FIRMS: "There is more work to be done before we feel completely comfortable about systemic firms. The Dodd-Frank Act, Basel III and other international agreements provide a framework for working towards the day, which is not here yet, where we can declare too big to fail as a thing of the past. But we do have some tools now that we didn't have in 2008 and 2009." BERNANKE ON CONFIDENCE: "I think it's quite true that business confidence, home-builder confidence, consumer confidence are very important and that good policies promote confidence. That's the Fed policy, congressional policy, we want to try and create a framework where people understand what's happening and they believe they have confidence that the basics of macroeconomic stability will be preserved. It is a difficult thing, to some extent it's a political talent to be able to create confidence in your constituents, so nobody has a magic formula for that. But clearly the more we can demonstrate that we're working together to try to solve these important problems the more likely we're going to instill confidence in the public and that in turn will pay off in economic terms." BERNANKE ON RECENT RISE IN INTEREST RATES: "There have been three reasons for it. The first is that the economic news has been a little better. For example there was a pretty strong labor market report that caused the yields to go up as investors became more optimistic. A second factor is probably that some excessively risky or leveraged positions unwound in the last month or two as the Federal Reserve communicated about policy plans. The tightening associated with that is unwelcome but then on the other hand at least there is the benefit of perhaps reducing some of those positions in the market." BERNANKE ON 7 PERCENT UNEMPLOYMENT RATE: "Seven percent is not a target, it was intended to be indicative of the amount of improvement we would like to see in the labor market. So I described a series of conditions that would need to be met for us to proceed with our moderation of purchases." BERNANKE ON INFLATION RATE: "Long term interest rates are roughly equal to the inflation rate plus the growth rate of the economy. The inflation rate we're looking to get to 2 percent. To the extent that, in the aftermath of the crisis and for other reasons the economy has a somewhat lower real growth rate going forward, that would imply a lower equilibrium interest rate as well." BERNANKE ON TREASURIES PURCHASES: "The Fed still owns a relatively small share of all the Treasuries outstanding. It's true that as the new issuance comes down that our purchases become a larger share of the flow of the Treasuries coming into the market. But we have not seen that our purchases are disrupting the Treasury market in any way and we believe that they have been effective in keeping interest rates low." BERNANKE ON STRUCTURAL UNEMPLOYMENT: "I think that probably about two percentage points or so say the difference between 7.6 and 5.6 is cyclical and the rest of it is what economists would call frictional or structural." "Most importantly so far we don't see much evidence that the structural component of unemployment has increased very much during this period, it's something we've been worried about because with people unemployed for a year or two years or three years they lose their skills, they lose their attachment to the labor market, and the concern is they'll become unemployable, so far it still appears to us that we can obtain an unemployment rate, we the country, can obtain an unemployment rate somewhere in the fives." BERNANKE ON JOBLESS RATE: "We are still far above the longer-run normal unemployment rate. To give you one illustration, the projections of the participants of the FOMC suggest that the long-run normal unemployment rate might be somewhere closer to 5.2 to 6 percent. But even beyond that, that amount of unemployment reflects the fact that there are people who don't have the right skills for the available jobs, who are located in the wrong parts of the country. So training, education, improving the functioning of the labor market, improving matching: there are things that can be done through labor policy, labor force policy that could even lower unemployment further than the Fed can through just increasing demand." BERNANKE ON COMMUNICATING WITH MARKETS: "I continue to believe that we should do everything we can to apprise the markets and the public about our plans and how we expect to move forward with monetary policy. I think not speaking about these issues would have risked a dislocation, a moving of market expectations away from the expectations of the (Fed policy) committee, it would have risked increased build up of leverage or excessively risky positions in the market, which I believe the unwinding of that is part of the reason for some of the volatility that we have seen. And so I think it's been very important that we communicate as best we can what our plans and our thinking is. I think the market is beginning to understand our message, and the volatility has obviously moderated." BERNANKE ON FISCAL POLICY: "I think that fiscal policy is focusing a bit too much on the short run and not enough on the long run. ... My suggestion to Congress is to consider possibilities that involved somewhat less restraint in the near term, and more action to make sure that we are in a sustainable path in the long run."
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