WASHINGTON, March 1 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
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
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. "