WASHINGTON, Feb 27 (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 POSSIBLE EXIT STRATEGIES: "First, we can simply allow securities on our balance sheet to run off and not replace them as we currently are doing. Secondly, we have a number of tools that can be used to drain reserves from the system such as reverse repos. Thirdly, we can raise interest rates even without reducing our balance sheet, by raising the interest rate we pay on excess reserves, which will in turn translate into higher interest rates in money markets. And fourth and finally ... eventually we can sell the securities back into the market in a slow, predictable way." "Each of the elements is something that we have tested, that we have seen other countries use, so we think we understand it pretty well." BERNANKE ON IMPORTANCE OF EQUAL OPPORTUNITY TO ECONOMY: "It is very important in its own right. We want everybody to have opportunities. We want a fair society. If talented people don't have the ability to move up and to get a good education and to move into the middle class, that's a loss for everyone, not just for those individuals. I think a society in which there's greater equality of opportunity will be a more productive and efficient society as well. ... "In the longer term, what matters is our productive capacity and there, human talent and skills is really the most important thing. In this country we had a period where we brought women into the labor force and that brought a whole new set of skills and talents into our economy. BERNANKE ON TOO BIG TO FAIL ISSUE: "We are not asking for any additional tools at this juncture. We continue to work on the orderly liquidation authority with the FDIC and at some point it would be good idea for Congress to review that process and see if you are comfortable with the approach that the FDIC in particular has suggested for dealing with a failing firm." BERNANKE ON EXIT TOOLS FOR EASING POLICY: "The tools that we (have) proposed to use such as the interest on reserves for example, or the draining of reserve tools that we have, they have been used quite frequently by the other central banks and they seem to work in their context." BERNANKE ON EFFECTS OF QUANTITATIVE EASTING: "We have seen recovery that is not as fast as we would like but it is nevertheless meaningful and is stronger than many other industrial countries. One way of interpreting Japan is that they, on the monetary side, ... were too cautious. One of the most salient facts about Japan is that they've had deflation, falling prices, now, for a number of years, and that is suggestive of a monetary policy which not achieving price stability. As you know, the new prime minister and new governor of the Bank of Japan are promising more aggressive policies to try and eliminate deflation. So you could look at that either way. ... Our best estimates suggest that it has had a meaningful, beneficial effect." BERNANKE ON REGULATION OF SMALL BANKS: "A broad inventory of the regulations affecting small banks would be worth doing in order to try to assess whether there are places where we can simplify, reduce the burden for those banks." BERNANKE ON JOBLESS RATE: "In the short term, it's our view that there is still a good bit of slack in the economy, that we are not using all the resources that we have. ... "It's hard to predict but a reasonable guess for 6 percent (unemployment) would be around 2016, about three more years." BERNANKE ON FISCAL CONTRACTIONS: "From the CBO's perspective there's a job effect rising from fiscal contractions, which again, I have said many times the Federal Reserve really can't overcome. We don't really have tools sufficiently powerful to overcome the impact of those types of fiscal contractions." BERNANKE ON CENTRAL BANK COORDINATION: "On monetary policy we exchange ideas and discuss the economy quite frequently in different settings but we don't directly coordinate monetary policy in the sense that we agree, as a general matter, to take actions together or in some sequence." BERNANKE ON UNUSED ECONOMIC RESOURCES: "I don't think the economy is overheating. There still seems to be quite a bit of unused resources, people that could be working, capital that could be used and is not being used. We believe the monetary policies that we've conducted have helped get stronger recovery and more jobs than we otherwise would have had." BERNANKE ON INTEREST RATES AND CREATING BUBBLES: "It's the cost of these policies and one that we take very seriously. We look at these possible mis-pricings and we ask ourselves are they in fact mis-pricings, how are large are they, and if they are mis-pricings, what is the vulnerability." "I ask you to what the alternative is - interest rates are low for a good reason. But if in fact we come to the conclusion that the costs of these pricings are sufficient then obviously we have to take it that into account." BERNANKE ON DOLLAR AS RESERVE CURRENCY: "I don't see any sign that that's happening (the U.S. dollar losing status as world's reserve currency). The amount of reserves held in dollars is actually growing, not shrinking. I think that reserve currency status at least for the foreseeable future is very much intact." BERNANKE ON SEQUESTRATION: "What I am advising is a more gradual approach. I'm not saying we should ignore the deficit, I am not saying we shouldn't deal with long-term fiscal issues, but I think that from the perspective of our recovery, a more gradual approach would be constructive. ... "The more gradual this is, as long as there is offsetting changes in the further horizon, the less the immediate impact will be on jobs and growth in this recovery in 2013. ... I think there is some cost to the economy of these repeated, I won't say 'crises,' but these repeated episodes where Congress is unable to come to some agreement and therefore some automatic thing kicks in, I think that's on the whole not a good thing for confidence." BERNANKE ON INTEREST ON RESERVES: "If we cut the interest on reserves, say to zero or slightly negative, which is possible, it would have a very, very small effect, in the right direction, but a very, very small effect on the incentives of banks to make loans. It's in the right direction but one of the reasons that we hesitated to do that is because it would also lower returns throughout the money markets in our economy and would create some problems in terms of the functioning of money markets, the federal funds market and other short-term cash markets. So it's not clear that the benefits in terms of more stimulus outweigh the costs in terms of market functioning." BERNANKE ON EXIT STRATEGY: "We haven't done a new review of the exit strategy yet. I think we will have to do that sometime soon. Even if we don't sell any securities, it doesn't mean that our balance sheet is going to be large for many years, it just would be maybe an extra year, that's all it would take to get down to a more normal size. So that's one issue, is how long to hold those securities and whether to use that as a substitute, an alternative, to asset purchases. I think that's something worth discussing, but I don't see any radical shift in the way this is going to happen. ... Again, as I said earlier, we are quite comfortable that we can exit in a way that is both smooth and in which we provide lots of information to markets in advance so they will know what's coming and be able to anticipate it." BERNANKE ON PREMATURE RISE IN INTEREST RATES: "The economy will get stronger because of good policies, and that in turn will cause rates to rise in a sustainable way. If we were to raise rates prematurely we would kill the recovery and rates would come down, and we would have a long-term situation with very low rates." BERNANKE ON STATE AND LOCAL BUDGETS: "The good news, I guess, and one of the reasons why I think we may have a somewhat stronger economy going forward, is that state and local governments seem now to have stabilized their budgets, and as a result we don't expect to see those ongoing layoffs to the extent we have in the past." BERNANKE ON BANK RESERVES: "One of the issues that has been an issue for a while is can banks put aside reserves against general risk and credit losses as opposed to losses to specific loans. So we have generally been supportive actually of banks doing more reserving so they would have some more reserves available against losses not yet seen." BERNANKE ON REMITTANCES TO TREASURY: "The reality here is that if interest rates rise very quickly, then there may be a period where we don't pay any remittances at all to the Treasury." "Under most, and I would say virtually all, scenarios we will be sending remittances to the Treasury of substantially higher than the norms established before the crisis." BERNANKE ON HIGHER RETURNS: "The best way to get sustainable high returns to savers is to get the economy back to running on all cylinders. It's somewhat paradoxical, but in some ways the best way to get interest rates up is to not raise them too quickly, because by keeping rates low, now, we can help the economies get stronger, we can create more jobs, we can create more momentum in the economy, that's the way to get a sustainable higher set of interest rates. Until we can get greater forward momentum, we are not going to get sustainable higher returns." BERNANKE ON ENERGY OUTPUT AND THE ECONOMY: "Energy is one of the bright spots in our economy in the last couple of years. We've seen tremendous increases in production of natural gas, increasing oil production, there's talk of coming close to at least to energy independence over the next few years. That's created a lot of jobs ... (and is) a positive factor in many parts of our country." BERNANKE ON NEW MORTGAGE STANDARDS: "The idea that QRM (Qualified Residential Mortgage) should be as broad or nearly as broad as QM (Qualified Mortgage) is very much on the table, and we appreciate the concerns of Congress that these criteria should not be so constraining as to prevent creditworthy borrowers from obtaining a mortgage." BERNANKE ON LOW INTEREST RATES: "One of the paradoxes is that the best way to get interest rates up is to have low interest rates, because that promotes a stronger growing economy and that causes interest rates to rise. In some ways the fact that interest rates have gone up a bit, and it happens on the real not the inflation side, is actually indicative of a stronger economy, which again suggests that maybe this is having some benefit." BERNANKE ON HEALTHCARE COSTS: "Recently in the last four to five years the healthcare costs have actually gone up somewhat more slowly. Part of that may be due to the recession and the fact that fewer people are able to afford or seek care. ... There remains a lot to be done in the health care area to improve incentives, to improve quality and to improve access." BERNANKE ON SUCCESS OF CURRENT POLICY: "If we see no progress for an extended period, which I don't expect because we've already seen some progress, then I think we want to discuss the efficacy side of the equation." "This is very much focused on the average American citizen. Our estimates are that we've helped create many private sector jobs, government jobs to support the economy quite significantly." BERNANKE ON FINANCIAL MARKETS: "The Treasury and the MBS market functioning is something that we do ... every hour because we are heavily engaged in those markets obviously. To this point we don't see any significant problems with those markets. But if we do see any problems obviously we will react to that." BERNANKE ON HOUSING MARKET RECOVERY: "The evidence thus far is that the housing market has hit the bottom and is recovering. We've seen rising prices over the last year or so. We've seen some significant increases in starts and sales. Foreclosures are still too high but they're coming down. The number of people under water on their mortgages is coming down. So we're still far from where we'd like to be but the evidence is that the housing market is strengthening." BERNANKE ON FOMC SUPPORT FOR CURRENT POLICY: "The significant majority of the committee is supportive of the policy that we are taking." BERNANKE ON FISCAL POLICY: "I cited in my testimony just the numbers from the Congressional Budget Office which suggest that fiscal measures will reduce growth this year by 1.5 percentage points which is very significant. ... "My suggestion for your consideration is to align the timing of your fiscal consolidation better with the problem, that is to do somewhat less in the very near term when it will have the greatest impact on growth and jobs and where the Federal Reserve doesn't have any scope to offset it and instead to focus on the longer term where the real problems I think still remain. "I am very much in favor of getting our fiscal house in order but I think it's a long run issue and I would be supportive of a less front-loaded set of measures."