WASHINGTON, July 17 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.
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
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
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
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
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."