Bernanke Delivers Semiannual Monetary Policy Report to Senate Banking Committee
AT TODAY’S SENATE BANKING COMMITTEE HEARING, lawmakers heard from Federal Reserve Chairman Ben Bernanke about the state of the economy and headwinds in the economic recovery.
Chairman Tim Johnson (D-S.D.) began his opening statement by applauding the work Congress and the Fed have accomplished so far to restore economic growth. Johnson argued for stronger and better funded regulators to enforce more stringent banking rules. Responding to those who have criticized the cost of financial regulation, he argued that the costs Wall Street bears “pales in comparison to the trillions of dollars Americans lost in the financial crisis.”
Sen. Michael Crapo (R-Idaho) called recent economic and job growth “disappointing,” and questioned the effectiveness of the Fed’s quantitative easing (QE) programs. He criticized Dodd-Frank regulations for creating a “drag on the economy” and adding to the complexity of the financial markets. Arguing that regulators do not understand the cumulative effect of the rules they implement, he stressed the importance of conducting cost-benefit analysis when considering new regulation.
Testimony
In his testimony, Bernanke described current economic conditions and discussed threats to the stability of the U.S. economy, most notably the euro zone crisis and the “fiscal cliff.” He said the economy continued to recover in the past year, but that growth has decelerated in recent quarters. He said economic growth can be influenced through appropriate monetary policy, despite low levels of confidence and investor demand. Still, he warned that job growth will be “frustratingly slow” as predicted levels of growth are not much greater than the growth of labor supply.
Bernanke highlighted two major sources of uncertainty and risk to economic growth. First, he provided an overview of the euro zone crisis. Although admitting that the crisis has intensified recently amidst political uncertainty in Greece and losses in Spanish banks, he said effects could be moderated by European Union (EU) strategies, such as three year bank financing. Second, he addressed the U.S. “fiscal cliff,” regarding the number of tax increases and spending cuts that are scheduled to take effect at the end of the year. Referring to a Congressional Budget Office report warning that a recession could occur if no action is taken, Bernanke stressed the importance of a solution that achieves long run sustainability while recognizing the “fragility of the recovery.”
Q&A
Fed Policy
Johnson asked about the factors that contributed to the decision to continue “Operation Twist.” Noting that the Fed brought interest rates close to zero in 2008, Bernanke said the Fed has had to rely on less conventional policy tools. In deciding whether to continue these policies, Bernanke said the Board must look carefully at the economy to judge if the recent “loss of momentum” is enduring.
Crapo referenced proposed legislation that exempts non-financial end users from posting margin requirements, asking Bernanke if he thought this exemption was appropriate. Bernanke said the Fed is “comfortable with that proposal.”
Crapo asked about the effectiveness of QE. Bernanke said QE and Operation Twist have been effective in “easing financial conditions” as was most evident when economic growth resumed following QE1 in March 2009. However, he said QE “should not be used lightly,” and the Fed will only continue QE policies if they are needed to sustain recovery in the labor market or react against deflation risk.
Sen. Bob Corker (R-Tenn.) asked about the range of additional tools the Fed is considering to foster growth. Bernanke mentioned different types of purchase programs concerning treasuries and mortgage-backed securities (MBS), discount windows for lending purposes, and cutting the interest rate the Fed pays in excess reserves.
Sen. Jim DeMint (R-S.C.) argued that keeping interest rates low is costing Americans $400 billion a year on lost interest in savings. Bernanke said the Fed understands that low interest rates are a “hardship” for many people, but explained that raising interest rates would cause the economy to weaken, which would also be bad for investors.
DeMint expressed concern about depreciation of the dollar and the hidden costs of QE. Bernanke countered that the Fed is paying “very close attention” to these concerns and has not yet seen “worrisome” inflation.
Libor Investigation
Johnson asked what the Fed knew about possible Libor manipulation and how the Fed addressed the situation. Bernanke said the New York Federal Reserve first received information from a phone call in April 2008 from a trader in Barclays New York who thought Barclays was underreporting to appear stronger in the financial crisis. Bernanke said the NY Fed then “responded quickly” to address the issue, informing all relevant authorities, including the Commodity Futures Trading Commission and the president’s working group. He also noted that the Fed released recommendations to remedy structural problems with Libor on June 1.
Sen. Robert Menendez (D-N.J.) criticized the “culture of greed, cheating, and lying” exposed by the Libor manipulation scandal. He asked how to address the situation. Bernanke said it would require international efforts to increase the visibility of the reporting process and lessen the ability of individual banks to affect it. He also suggested switching from a reported rate to an observable market rate as an index.
Sen. David Vitter (R-La.) wanted to know if the Fed investigated U.S. banks to determine if they were guilty of Libor manipulation as well. Bernanke replied that the Fed informed the responsible authorities as soon as possible and investigations were taken up by agencies with the most direct responsibility.
Sen. Patrick Toomey (R-Pa.), noting that Bernanke said the Fed first became aware of potential Libor manipulation in 2008, asked about a Wall Street Journal account that shows communication concerning Libor fixing in 2007. Bernanke responded that those calls were made by junior employees who did not understand what Libor was and how it was constructed.
Sen. Jeff Merkley (D-Ore.) asked Bernanke to clarify between manipulations of Libor to appear healthier and to make profit. Bernanke said the Fed heard about banks underreporting their cost of borrowing to avoid looking weak in 2008, noting this was most intense during the crisis. He said the other type of violations arose from “clear evidence” of individual traders conspiring with others to manipulate Libor submissions to improve profits from short term derivatives trades. Bernanke said he was unaware of the second type of violation until it recently came out in the media.
Sen. Kay Hagan (D-N.C.) asked about other rates that could be used besides Libor. Bernanke mentioned the general collateral repo rate and noted its use in coming from a market where trades occur at a number of different maturities. He said the important quality that distinguishes other rates from Libor is their basis on observable transactions and lack of ambiguity.
Fiscal Cliff
Reed asked if a fiscal cliff resolution that is heavy on spending and entitlement cuts could further impact unemployment. Bernanke replied that it could, and that the strategy should be to make a long run sustainable plan soon that allows the effects of cuts to come in gradually.
Following up, Corker asked about the effects of “kicking the can down the road.” Bernanke said addressing both taxes and spending is important and that delaying decision making would negatively affect the economy.
Sen. Mike Johanns (R-Neb.), noting the decision Congress faces between massive spending cuts and extending taxes, asked Bernanke if he supported a plan similar to the Simpson-Bowles strategy for deficit reduction. Bernanke agreed the plan seemed reasonable but avoided endorsing any individual components.
Sen. Roger Wicker (R-Miss.) asked about the effects of raising taxes on citizens whose income is above $250,000. Bernanke said it could reduce incentives and aggregate demand, but mentioned efficiency, growth, and equity concerns.
State of the Economy
Sen. Sherrod Brown (D-Ohio) listed several examples of Wall Street “breaking the rules” that have occurred since 2008, arguing that banks have become too big to regulate. Bernanke agreed that the real issue is “too big to fail,” explaining that an end to the safety net will put pressure on banks to break up into more manageable sizes.
Sen. Herb Kohl (D-Wis.) expressed concern about “disappointing” jobs numbers and asked why the Fed has been “slow to tackle unemployment.” Bernanke countered that the Fed has taken a “wide range of actions,” including continuing the maturity extension program in June.
For testimony and a webcast of the hearing, please click here.
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AT TODAY’S SENATE BANKING COMMITTEE HEARING, lawmakers heard from Federal Reserve Chairman Ben Bernanke about the state of the economy and headwinds in the economic recovery.
Chairman Tim Johnson (D-S.D.) began his opening statement by applauding the work Congress and the Fed have accomplished so far to restore economic growth. Johnson argued for stronger and better funded regulators to enforce more stringent banking rules. Responding to those who have criticized the cost of financial regulation, he argued that the costs Wall Street bears “pales in comparison to the trillions of dollars Americans lost in the financial crisis.”
Sen. Michael Crapo (R-Idaho) called recent economic and job growth “disappointing,” and questioned the effectiveness of the Fed’s quantitative easing (QE) programs. He criticized Dodd-Frank regulations for creating a “drag on the economy” and adding to the complexity of the financial markets. Arguing that regulators do not understand the cumulative effect of the rules they implement, he stressed the importance of conducting cost-benefit analysis when considering new regulation.
Testimony
In his testimony, Bernanke described current economic conditions and discussed threats to the stability of the U.S. economy, most notably the euro zone crisis and the “fiscal cliff.” He said the economy continued to recover in the past year, but that growth has decelerated in recent quarters. He said economic growth can be influenced through appropriate monetary policy, despite low levels of confidence and investor demand. Still, he warned that job growth will be “frustratingly slow” as predicted levels of growth are not much greater than the growth of labor supply.
Bernanke highlighted two major sources of uncertainty and risk to economic growth. First, he provided an overview of the euro zone crisis. Although admitting that the crisis has intensified recently amidst political uncertainty in Greece and losses in Spanish banks, he said effects could be moderated by European Union (EU) strategies, such as three year bank financing. Second, he addressed the U.S. “fiscal cliff,” regarding the number of tax increases and spending cuts that are scheduled to take effect at the end of the year. Referring to a Congressional Budget Office report warning that a recession could occur if no action is taken, Bernanke stressed the importance of a solution that achieves long run sustainability while recognizing the “fragility of the recovery.”
Q&A
Fed Policy
Johnson asked about the factors that contributed to the decision to continue “Operation Twist.” Noting that the Fed brought interest rates close to zero in 2008, Bernanke said the Fed has had to rely on less conventional policy tools. In deciding whether to continue these policies, Bernanke said the Board must look carefully at the economy to judge if the recent “loss of momentum” is enduring.
Crapo referenced proposed legislation that exempts non-financial end users from posting margin requirements, asking Bernanke if he thought this exemption was appropriate. Bernanke said the Fed is “comfortable with that proposal.”
Crapo asked about the effectiveness of QE. Bernanke said QE and Operation Twist have been effective in “easing financial conditions” as was most evident when economic growth resumed following QE1 in March 2009. However, he said QE “should not be used lightly,” and the Fed will only continue QE policies if they are needed to sustain recovery in the labor market or react against deflation risk.
Sen. Bob Corker (R-Tenn.) asked about the range of additional tools the Fed is considering to foster growth. Bernanke mentioned different types of purchase programs concerning treasuries and mortgage-backed securities (MBS), discount windows for lending purposes, and cutting the interest rate the Fed pays in excess reserves.
Sen. Jim DeMint (R-S.C.) argued that keeping interest rates low is costing Americans $400 billion a year on lost interest in savings. Bernanke said the Fed understands that low interest rates are a “hardship” for many people, but explained that raising interest rates would cause the economy to weaken, which would also be bad for investors.
DeMint expressed concern about depreciation of the dollar and the hidden costs of QE. Bernanke countered that the Fed is paying “very close attention” to these concerns and has not yet seen “worrisome” inflation.
Libor Investigation
Johnson asked what the Fed knew about possible Libor manipulation and how the Fed addressed the situation. Bernanke said the New York Federal Reserve first received information from a phone call in April 2008 from a trader in Barclays New York who thought Barclays was underreporting to appear stronger in the financial crisis. Bernanke said the NY Fed then “responded quickly” to address the issue, informing all relevant authorities, including the Commodity Futures Trading Commission and the president’s working group. He also noted that the Fed released recommendations to remedy structural problems with Libor on June 1.
Sen. Robert Menendez (D-N.J.) criticized the “culture of greed, cheating, and lying” exposed by the Libor manipulation scandal. He asked how to address the situation. Bernanke said it would require international efforts to increase the visibility of the reporting process and lessen the ability of individual banks to affect it. He also suggested switching from a reported rate to an observable market rate as an index.
Sen. David Vitter (R-La.) wanted to know if the Fed investigated U.S. banks to determine if they were guilty of Libor manipulation as well. Bernanke replied that the Fed informed the responsible authorities as soon as possible and investigations were taken up by agencies with the most direct responsibility.
Sen. Patrick Toomey (R-Pa.), noting that Bernanke said the Fed first became aware of potential Libor manipulation in 2008, asked about a Wall Street Journal account that shows communication concerning Libor fixing in 2007. Bernanke responded that those calls were made by junior employees who did not understand what Libor was and how it was constructed.
Sen. Jeff Merkley (D-Ore.) asked Bernanke to clarify between manipulations of Libor to appear healthier and to make profit. Bernanke said the Fed heard about banks underreporting their cost of borrowing to avoid looking weak in 2008, noting this was most intense during the crisis. He said the other type of violations arose from “clear evidence” of individual traders conspiring with others to manipulate Libor submissions to improve profits from short term derivatives trades. Bernanke said he was unaware of the second type of violation until it recently came out in the media.
Sen. Kay Hagan (D-N.C.) asked about other rates that could be used besides Libor. Bernanke mentioned the general collateral repo rate and noted its use in coming from a market where trades occur at a number of different maturities. He said the important quality that distinguishes other rates from Libor is their basis on observable transactions and lack of ambiguity.
Fiscal Cliff
Reed asked if a fiscal cliff resolution that is heavy on spending and entitlement cuts could further impact unemployment. Bernanke replied that it could, and that the strategy should be to make a long run sustainable plan soon that allows the effects of cuts to come in gradually.
Following up, Corker asked about the effects of “kicking the can down the road.” Bernanke said addressing both taxes and spending is important and that delaying decision making would negatively affect the economy.
Sen. Mike Johanns (R-Neb.), noting the decision Congress faces between massive spending cuts and extending taxes, asked Bernanke if he supported a plan similar to the Simpson-Bowles strategy for deficit reduction. Bernanke agreed the plan seemed reasonable but avoided endorsing any individual components.
Sen. Roger Wicker (R-Miss.) asked about the effects of raising taxes on citizens whose income is above $250,000. Bernanke said it could reduce incentives and aggregate demand, but mentioned efficiency, growth, and equity concerns.
State of the Economy
Sen. Sherrod Brown (D-Ohio) listed several examples of Wall Street “breaking the rules” that have occurred since 2008, arguing that banks have become too big to regulate. Bernanke agreed that the real issue is “too big to fail,” explaining that an end to the safety net will put pressure on banks to break up into more manageable sizes.
Sen. Herb Kohl (D-Wis.) expressed concern about “disappointing” jobs numbers and asked why the Fed has been “slow to tackle unemployment.” Bernanke countered that the Fed has taken a “wide range of actions,” including continuing the maturity extension program in June.
For testimony and a webcast of the hearing, please click here.