WASHINGTON, July 18 Below are highlights from the question and
answer session of a Senate Banking Committee hearing on Thursday with Federal
Reserve Chairman Ben Bernanke testifying on monetary policy and the U.S.
economy. Bernanke repeated the prepared testimony he delivered on Wednesday to
the House Financial Services Committee.
BERNANKE ON DATA SINCE JUNE MEETING; POSSIBLE SEPTEMBER CHANGE TO QE:
"The June FOMC meeting was only a few weeks ago. There have been some data
points since then and...they have been mixed. So I think it's way too early to
make any judgment. We will obviously review the data and what we're looking for
is a pick-up as the year progresses."
"One of the reasons that the economy has been so slow in the early part of
2013 is because of fiscal factors. It's hard to judge how long those factors
will last. But if the economy begins to move beyond that point and fiscal
restraint becomes somewhat less pronounced then we should see as you said a
pick-up in growth."
"We're obviously going to look at the data, it's a committee decision (on
whether to taper QE in September), and it's going to depend on whether we see
the improvement which I described."
BERNANKE ON REFORMING MORTGAGE MARKET:
"A key issue is going to be not so much making mortgages cheaper but rather
making sure that there is some kind of backstop or protection for situations
where the financial markets are in distress, like they were recently. And the
question is - the government is one way to do that, there may be other ways to
do that - but if the government is involved, I think it would be very important
to make sure first of all that the government is appropriately compensated for
whatever insurance or backing it provides, and secondly that firms that are
securitizing hold enough capital, again, to protect the taxpayer from losses. If
that's done, I think those would be very helpful if you come to a solution that
involves a government role."
BERNANKE ON GOLD:
"Gold is an unusual asset. It's an asset that people hold as disaster
insurance. A lot of people hold gold as an inflation hedge. But movements of
gold prices don't predict inflation very well, actually.
"But anyway, the perception is that by holding gold you have a hard asset
that will protect you in case of some kind of major problem. I suppose that one
reason gold prices are lower is that people are less concerned about extreme
outcomes, particularly negative outcomes and therefore they feel less need for
whatever protection gold affords...
"Gold price going down is not necessarily a bad thing from that perspective.
It suggests people have somewhat more confidence, and are less concerned about
really bad outcomes. But let me just end by saying that nobody really
understands gold prices, and I don't pretend to understand them either."
BERNANKE ON BANK CAPITAL ADEQUACY:
"Basel III is a floor, it's not a ceiling. It's really a least common
denominator....We are prepared to do whatever additional steps are needed in
order to make our financial systems safe. I don't know whether all countriees
will follow us but there are other countries, Switzerland comes to mind, U.K.,
that have thought hard about this and have taken additional steps to strengthen
their banking systems. We do have a leadership position and I hope that will
happen, but I don't think it will be universal....The key financial centers,
which recognize how important banks are to their economy, but also the fact that
in some cases the banks are bigger than their economy, recognize that it's very
important to have stability, and they have been particulary willing to consider
BERNANKE ON VIEWS AT FED POLICY MEETING:
"We have a very careful discussion at the meeting. We have what's called a
go-around where every person including the non-voters gets to express for
several minutes their view on policy, their current perspective. And the general
scenario which I described in my press conference is broadly supported by people
on the (policy-setting Federal Open Market) Committee, including both voters and
BERNANKE ON MEASURING INFLATION:
"There was a bipartisan commission on inflation measurement a few years ago
which concluded that the official inflation numbers overstated, not understated
inflation. So some of the changes that they recommended have been included.
"There's a distinction between prices being high and prices rising...(cost
of living) isn't going up, it's high, it's not going up. In other words, real
wages are going down because even though inflation is very low wages have been
growing slower than inflation...and it has to do with productivity in the
economy and distribution of income and the Fed really can't do a whole lot about
BERNANKE ON GROWTH, EMPLOYMENT OUTLOOK
"We specifically set as a goal an improvement in the outlook for the labor
market, as opposed to the labor market per se, and what that means is that we
want to see improvement in labor market indicators, but we also will have a
sense that improvement will continue, and for improvement to continue you need
to have a broader-based growth."
BERNANKE ON FINANCIAL STABILITY RISKS AND LOAN COVENANTS:
"It's very difficult to know exactly what the size of the risk is... For
example, we might be looking at covenants on loans and whether or not those
covenants are becoming less restrictive, which is suggestive of poor
underwriting. We monitor those kinds of things and we report those to the FOMC
at essentially every meeting so they can understand where there may be sectors
where financial risk is building and try to gauge those risks."
BERNANKE ON POLICY AND ECONOMIC GROWTH POTENTIAL:
"It's true that no monetary policy can do very much about the long-term
growth potential of the economy, but in a situation where we are well below that
potential, if we can get back to that potential more quickly, that is a net gain
that is enjoyed by the economy."
BERNANKE ON THE EFFECTIVENESS OF QUANTITATIVE EASING:
"The preponderance of the evidence is that, while this is not as powerful a
tool as ordinary monetary policy - rate policy - that it does have a meaningful
impact on jobs and on the economy. In particular, since 2008 where we've had no
ability to move short-term rates, and we've had some periods where we became
somewhat more concerned about deflation, we think that QE has provided an
important boost at critical times to help the economy continue to move forward."
BERNANKE ON STUDENT DEBT AND FINANCIAL STABILITY:
"The amount of student debt is large, it's over a trillion dollars. At this
point, I think that it's not particularly likely to cause any sharp instability
of the sort we saw in the last few years."
BERNANKE ON NOT THREATENING CONGRESS WITH HIGHER RATES:
"I don't think we should be in a position of trying to threaten Congress
with higher interest rates or something like that."
BERNANKE ON MONETARY POLICY AND FINANCIAL STABILITY:
"The relationship between monetary policy and financial stability is a
complicated one...very low rates for a sustained period can lead to reach for
yield and other risky behavior. We are trying to address that primarily through
regulation, through oversight, through monitoring, and that's our first line of
defense, certainly, for dealing with those sorts of issues."
BERNANKE ON NEED FOR CONTINUED MONETARY ACCOMMODATION:
"With inflation below target and with unemployment still quite high - and by
some measures with unemployment in some ways being even too optimistic a measure
of the state of the labor market... - both sides of our statutory mandate are
suggesting that we need to maintain a highly accommodative monetary policy for
the foreseeable future. And that's what we intend to do."
BERNANKE ON THE FED'S BALANCE SHEET:
"Ultimately we will stop rolling over and reinvesting the securities and
then they will begin to run off and then the balance sheet will start to come
down. We have done a lot of scenario analysis, of course, and allowing the
securities to run off at a certain point when the economy is strong enough does
not delay (balance sheet) normalization by very much."
We are "certainly not (expecting winding down of balance sheet) until we get
to the rate increase part of the ... sequence that I described to you and there,
again, we are not planning at this point to sell any MBS, what we would be doing
is at some point allowing the maturing securities just to run off and not
BERNANKE ON HOUSING:
"One of the risks that we face now is that there is still a pretty
significant part of the population that is having considerable difficulty
accessing mortgage credit even though they may have the financial wherewithal to
be worthy of that credit."
BERNANKE ON ASSESSING RISKS OF QUANTITATIVE EASING:
"There are costs and risks to QE and we are watching those carefully. We've
said in our statement that one of the considerations that we're looking at in
every meeting is the efficiency and costs of this program and we do a benefit
cost analysis and we discuss the benefits of additional purchases."
BERNANKE ON REASONS BEHIND HIGHER LONGER-TERM RATES:
"There has been some better economic news. As investors see brighter
prospects ahead, interest rates tend to rise. For example we saw a relatively
good labor market report, which was accompanied by a pretty sharp increase in
"The second reason for increases in rates is probably the unwinding of
leveraged and perhaps excessively risky positions in the market. It's probably a
good thing to have that happen, although the tightening that's associated with
that is unwelcome. But at least the benefit of that is that some concerns about
building financial risks are mitigated in that way and probably make some FOMC
participants comfortable with this tool going forward."