(Adds Bernanke on the the impact of QE on commodity prices)
WASHINGTON, July 13 (Reuters) - The following are highlights of Federal Reserve Chairman Ben Bernanke’s testimony on Wednesday to the House of Representatives Financial Services Committee as part of his semi-annual testimony on the U.S. economy and monetary policy.
For a story on Bernanke’s testimony, see [ID:nW1E7IB008]
For highlights of Bernanke’s prepared remarks, see [ID:nW1E7IB007
For a text of Bernanke's prepared remarks, see here
BERNANKE ON THE IMPACT OF QUANTITATIVE EASING PROGRAMS ON COMMODITY PRICES
“There has been some contribution to commodity prices, which we anticipated. Again, I think that supply and demand factors globally were by far the more important. But that increase in commodity prices offset some of the benefits that lower interest rates or accommodative financial conditions have for growth and for addressing the risks of inflation.”
“With 9.2 percent unemployment, the economy still requires a good deal of support. As we go forward, we are going to want to make sure that as we support the recovery, that we also keep an eye on inflation and make sure it stays well contained.”
“I think we have to keep all the options on the table. We don’t know where the economy is going to go. And if we get to a point where ... the recovery is faltering and we’re looking at inflation dropping down toward zero, or something where inflation issues are not relevant, then, you know, we have to look at all the options.”
“One thing we can clearly do to support the dollar is to keep our inflation rate low and that is what we’ve done.”
“Fannie and Freddie were effectively subsidized and therefore a private market system is probably going to increase the cost of mortgages a little bit, but that is the consequence of taking away a subsidy that in the end proved to be very costly to our economy. Currently there is not much private capital because of concerns about housing market, concerns about still-high default rates. I suspect though that when the housing market begins to show signs of life that there will be expanded interest. I don’t see a reason why the private sector can’t play a big role in the housing market securitization going forward.”
BERNANKE ON “THE RIGHT ANALOGY” FOR NOT RAISING THE DEBT CEILING
“The analogy about balancing your check book and getting your finances in order is wrong. The right analogy for not raising the debt ceiling is going out and having a spending spree on your credit card and then refusing to pay the bill. That’s what not raising the debt limit is.”
In terms of longer-term growth we really don’t want to just cut, cut, cut or we want to look at what we’re cutting and how we’re cutting. We want to make sure we’re doing the things, making the investments that will help the economy grow and that includes things like fixing the tax code and so on... You need to be a little bit cautious about sharp cuts in the very near term because of the potential impact on the recovery. That doesn’t at all preclude -- and in fact I believe it is entirely consistent with -- a longer-term program that will bring our budget into a sustainable position.”
”The risk is that interest rates will begin to rise as our creditors lose confidence in our ability to repay, or willingness to repay. When Treasury rates rise, of course it makes the deficit worse and makes the problem even worse. Interest rates on Treasury debt feed into all other interest rates in our economy, including farm mortgages, capital for oil or natural gas exploration, and consumer loans of all kinds.
“It would weaken our economy, make the deficit worse and it would hurt confidence and be a negative. I am very much in favor of trying to address this problem in a big way, again taking a long-term perspective and understanding this is a long-term problem.”
BERNANKE ON WHAT WOULD HAPPEN IF DEBT CEILING ISN‘T RAISED
”The assumption is that as long as possible the Treasury would want to try to make payments on the principle and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy.
”So just as a matter of arithmetic fairly soon after that date there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money.
”If, in fact, we ended up defaulting up the debt -- or even if we didn‘t, I think it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive of course because that makes the deficit worse.
”But clearly if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and the most liquid security in the world. It’s the foundation for much of our financial system and the notion that it would become suddenly unreliable and illiquid would throw shockwaves through the entire global financial system.
“I think it reflects a lot of things. It reflects global uncertainties. The reason people hold gold is as a protection against what we call tail risks, really, really bad outcomes. To the extend that the last few years have made people more worried about the potential of a major crisis, then they have the protection of gold.”
“No. It’s not money. It’s an asset, but it’s not money.”
“We need an increase in the debt limit, which will prevent us from defaulting on obligations we have already incurred, and which will create tremendous problems for our financial system and our economy. But we also need, of course, to take a serious attack on the unsustainability on our fiscal position.”
”We certainly cannot continue on an unsustainable path. If we were to do so, in the long term clearly we would have higher interest rates, less capital formation, more foreign borrowing, slower growth of the economy. But I think we even risk worse if we were to lose the confidence of foreign creditors and have a threat to our fiscal and financial security.
“So I do think it’s important to address these long-term issues. I guess I would emphasize ... that these are long-term issues. It doesn‘t’ have to be solved today or tomorrow. But we need to take some important steps to look at this long-term perspective and to try to restore some stability and sustainability to our fiscal outlook.”