March 2, 2011 / 4:59 PM / 9 years ago

Highlights: Bernanke's testimony to House panel

WASHINGTON (Reuters) - The following are highlights from Federal Reserve Chairman Ben Bernanke’s testimony to the House of Representatives Financial Services Committee on Wednesday on the central bank’s semi-annual report on U.S. monetary policy.

BERNANKE ON ALLOWING STATES TO GO BANKRUPT:

“The bankruptcy idea is a very complex one because of states rights issues. You have to raise the question, could a bankruptcy judge tell a state to raise taxes, for example? So I think there are some very thorny legal questions at the very beginning of that debate.”

BERNANKE ON MUNICIPAL BOND MARKET:

“Essentially in every major financial market, and this is one of them, we do have people who are paying close attention to developments there. Recently, things have improved a bit, that’s my sense, in part because of the better economy and because of progress that is being made on the budgets.”

BERNANKE ON INFLATION AND TIMING OF QE2 UNWINDING:

“It depends a lot whether inflation expectations remain anchored and what’s happening to the broader basket. Oil prices alone would probably not be enough to make us respond.”

BERNANKE ON UNWINDING OF ACCOMMODATION:

“The language, the communication is just one way that we use to provide additional policy support to the economy, which in our judgment it still needs. The economy’s recovery is not firmly established and we think monetary policy needs to be supportive. Clearly if we leave policy too accommodative for too long that would lead to inflation, that’s why we need to unwind the language, the asset purchases, the interest rate policy. All those things are going to have to be unwound at the appropriate time. At this point it’s not creating inflation, but it would if we didn’t unwind it at an appropriate time.”

BERNANKE ON COMMITMENT TO KEEP INFLATION LOW:

“Our objective is to hit low and stable inflation in the medium-term. To the extent we have entirely temporary fluctuations that are not being fed into the broader inflation basket, we have to look through those to some extent. But again, we are going to be looking very carefully at inflation expectations and making sure that people stay confident that inflation will stay low. And we will address that.”

“And, again, I want to reassure you that we have learned the lessons, as central bankers, have learned the lessons of the 70s. We will not allow inflation to get above low and stable levels.”

BERNANKE ON OIL AND INFLATION:

“I recognize that the increases in gas prices are very troubling for a lot of people and very difficult, but they are not inflation per se. Inflation is an increase in the overall price level, which is very low. The inflation rate right now is 1.2 percent for all goods and services. The main risk from a price stability point of view would be if higher gas prices, for example, would start feeding into the broader basket because people came to expect higher inflation, began to demand higher wage increases, or those costs were being regularly passed on by producers that overall inflation would begin to rise. That would be the point at which we would become very concerned and make sure that we would take monetary policy actions to avoid any significant increase in overall inflation. The relative price of oil, again, is primarily due to global supply and demand.”

BERNANKE: NO MAJOR SHIFT AWAY FROM THE DOLLAR:

“I just don’t see at this point that there is a major shift away from the dollar. I would add also, on the commodity prices, that, first, that the fears of some foreign governments that we were, quote, manipulating the currency, by which one means that we were reducing the value of the dollar, has not come true. The dollar has not moved very much at all. And commodity prices have risen just about as much in other currencies as they have in terms of the dollar. So, while I take those commodity price increases very seriously, I don’t think they are primarily a dollar phenomenon.”

BERNANKE ON IMPACT OF BUDGET CUTS:

“Our sense is that a $60 billion cut spread out in the normal way would reduce growth, but we think, given the size, it’s more in a couple of one, two tenths in the first year and another tenth in the next year, something in that order of magnitude and that would translate into couple of hundred thousand jobs. So it’s not trivial.”

BERNANKE ON DEFICIT:

“The concern is if the federal deficit remains on an unsustainable path, that we could see at some point an increase in interest rates, which would be both bad for the recovery, bad for financial stability. That would obviously go against the efforts of the Fed to keep interest rates low so we can have a recovery. While I understand these are difficult decisions and we certainly can’t solve it all in the current fiscal year, I do think we need to look forward. It will be very constructive for Congress to lay out a plan that will be credible, that will help bring us to sustainability over the next few years. In particular, one rule of thumb is the ratio of the debt to GDP stops rising. Currently it’s rising relatively quickly. If we can stabilize that, that will do a lot to increase confidence in our government and in our fiscal policy.”

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