12 Min Read
WASHINGTON, Feb 29 (Reuters) - Below are highlights from the question and answer session of a House Financial Services Committee hearing with Federal Reserve Chairman Ben Bernanke testifying on monetary policy and the U.S. economy.
"All the central banks in question have similar tools to what we have, including the ability to pay interest on reserves, the ability to sell assets and the ability to sterilize their balance sheets. So I think we all have adequate tools to withdraw that accommodation and to shrink those balances sheets at the appropriate time. So I think this is currently the best approach, where the best available approach is to provide additional financial accomodation in a world where rates are close to zero and we can't obviously go below zero."
"Generally the firewalls, which are European funding to stand as a backstop in case there is contagion, we think more needs to be done there. And the Europeans I am sure will be looking at that and trying to strengthen those firewalls, so I think there is more to be done there.
"Spain I think is doing better. They have made progress in terms of their fiscal consolidation. They are taking actions to strengthen their banking system, and their cost of credit has gone down, probably in part because of fundamentals but also in part because of the ECB's long-term refinancing operations."
"We have looked at the possibility of not paying that 25 bps, one fourth of one percent, that we currently pay from the perspective of: Would it be beneficial to the economy? The federal funds rate is currently around 10-12 bps or something like that, so eliminating that might lower it still further but probably not below zero, so the stimulative effect, the effect on interest rates generally of eliminating that, or the effect on credit extension would be quite small.
"On the other side, we had some concerns about the effects of the ... zero rates on various financial institutions like money market mutual funds, also on the functioning of federal funds market itself - we have weaker guidance from the market in terms of on what the funds rate actually is because there are fewer participants than there used to be because the rates are so low it doesn't cover the costs of making the market. So I think there are some financial side effects that would be negative and the benefits to the economy would be very small, and for that reason we haven't reduced the (reserve rate)."
"I know there has been some debate about the word 'printing'. It is in fact the case that the amount of currency in circulation has not been affected by any of these policies (such as quantitative easing by major central banks). What has happened is the amount of electronic reserves held at the Federal Reserve has gone up by a great deal. They are sitting there, they are not doing much. ... So far we have not seen any indication that they have proved inflationary."
"I have expressed concerns about what would happen on January 1st (2013), which would be a major fiscal contraction. I think it would pose a risk to the recovery. What I have advocated is a two-part process, one which is critical that we have a sustainable path going forward in the medium and long term, but that at the same time we pay attention to the recovery and make sure we don't snuff it ... unintentionally."
"If market participants are not persuaded that the United States is on a sustainable fiscal course, then eventually something will give. And that could be a financial crisis. It could be something else."
BERNANKE ON IF IRANIAN BANKS CAN BE EXCLUDED FROM SWIFT, A GLOBAL ELECTRONIC MONEY TRANSFER SYSTEM:
"My understanding is that it would feasible. And it's a very important system because it's part of almost every international money transfer that occurs. So it could be a real problem for Iranian financial markets, or financial institutions if they were banned from using it."
"In general, I think there is some evidence that rules or structures are helpful in getting better fiscal outcomes. For example, offsets and things of that sort. I think one year might be too short a time to demand balance, but over a longer period of time with appropriate provisions, some kind of rule - I don't whether you want to (go) the amendment route or not - but I think some kind of rule for the Congress to provide a guidepost both to its own deliberations and for the public's awareness could be a helpful structure to make things happen."
"We're concerned about it as well. It has a direct effect on inflation and it also is bad for growth because it takes away buying power for households. So it is a real concern for us. On the other hand, overall inflation is low and stable, so it is really a question of this particular product becoming more expensive to other products."
"Right now, we don't see any obvious bubbles in the economy but certainly that's something we are going to need to look at and continue to monitor."
"We obviously are very integrated. About 2 percent of our GDP is in the form of exports to Europe, so if Europe has a significant slowdown we would feel that. Our companies are highly integrated, you think of companies like Ford and GM which (are) in Europe as well as the United States. However. we do think that if Europe has a mild downturn, which is what they are currently forecasting, and if the financial situation remains under control, that the effect on the U.S. might not be terribly serious, at least it probably would not threaten the recovery. But nevertheless it would have an effect, certainly."
"The swap lines seem to have been very successful. They have reduced the overall stress in dollar funding markets and looks like at this particular point that the demand for those swaps are starting to go down."
"We are monitoring that very carefully. ... Our basic conclusion is that direct exposure of U.S. banks to European sovereign debt is quite limited, particularly on the periphery. Exposure to Italy and Spain is somewhat greater obviously than to the smaller three countries. We think generally the banks have done a pretty good job in hedging the exposures they have to sovereign debt and to some extent the European banks."
"Having said that, I think if there were a major financial accident in Europe, that the main effects on our banks would not be so much through direct exposures as through general contagion - aside from risk taking, loss of face in the financial system, economic stress and so on. So I think there is a significant risk even though we have done what we can to make sure that banks are managing their direct exposure to banks and sovereigns in Europe."
"It does matter. Leaving the euro would be very difficult and uncontrolled, disorderly default would cause a lot of problems."
"It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero. We have an economy where demand falls far short of the capacity of the economy to produce. We have an economy where the amount of investment in durable goods spending is far less than the capacity of the economy to produce. That suggests that interest rates in some sense should be lower rather than higher. We can't make interest rates lower, of course. (They) only can go down to zero. And again I would argue that a healthy economy with good returns is the best way to get returns to savers."
I do think that monetary policy has been constructive in bringing employment back towards the maximum employment level. Congressman Frank pointed out the sharp movement in March 2009, that was exactly the date when we began QE1. Since QE2 in November 2010, there have been two and half million new jobs created and I don't claim credit for all those jobs, and of course many other factors are at work, but I think that it (monetary policy) has been constructive.
"In terms of what long-term employment and productivity gains can be sustained by this economy, monetary policy cannot be the answer to that. The answer is the private sector, but in partnership with ... other economic policies - ranging from trade, regulation, education, infrastructure, tax code and so on. All those are in the province of the Congress."
"The Fed has no official position on principal reduction and we were careful not to make explicit recommendations, precisely because we thought that was a congressional prerogative to make those determinations. We tried to provide a balanced analysis of principal reduction. I think it's a complex subject. It's not that we disagree on the goals, we want to reduce foreclosures and delinquencies, we want to help people who want to move to be able to do that, but there are often a number of alternatives in different situations. For example, if the idea is just to be able to move, then a short sale or deed-in-lieu might be the most effective way to do it."
"We are certainly paying attention to the effects of low interest rates not only on savers but on other financial institutions. ... From the point of view of savers, for most savers, something less than 10 percent of all savings by retirees is in the form of fixed-interest instruments like CDs. Remember, people also own equities, they own money-market funds, they own mutual funds, they have 401Ks and a variety of things and those assets are assets whose returns depend very much on how strong the economy is. So in trying to strengthen the economy, we are actually helping savers by making the returns higher as we can see in the stock market, for instance."
"Achieving long-run sustainability and providing comfort to the public and the markets that deficits will come under control over a period of time - that's very important for confidence and for creating more support for the recovery. But at the same time, I think you also have to protect the recovery in the near term. Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."
BERNANKE ON THE CONSEQUENCES OF UNSUSTAINABLE FISCAL POLICY:
"Once the markets lose confidence in the ability of the government to maintain fiscal sustainability then there are numerous risks. The most extreme case would be a financial crisis or a sharp increase in interest rates analogous to what we see in some European countries. Even absent that extreme result, large deficits and debt over a longer period of time raise interest rates above levels where they normally would be and crowd out investment, and are bad for growth and productivity. They also may involve borrowing from foreign lenders which also is a drain on current U.S. income. So it is important to address this issue."