Mar.Bernanke Delivers Semiannual Monetary Policy Report to SBC
At a Senate Banking Committee hearing on March 1, Federal Reserve Chairman Ben Bernanke delivered the Fed’s semiannual monetary policy report and offered remarks that mirrored his testimony during yesterday’s House Financial Services Committee hearing.
In his testimony, Bernanke said the pace of expansion has been “uneven and modest” by historical standards.
He said private payroll employment has increased by an average of 165,000 jobs per month since the middle of last year, and nearly 260,000 new private-sector jobs were added in January, but, in the public sector, layoffs by state and local governments have continued and overall, high unemployment rates will continue.
“The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its longer-term trend; continued improvement in the job market is likely to require stronger growth in final demand and production,” Bernanke said. “Notwithstanding the better recent data, the job market remains far from normal: The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high.”
On housing, Bernanke said that while prices have come down, “increasing affordability dramatically,” many potential buyers lack the down payment and credit history required to qualify for loans while others are reluctant to buy a house because of economic concerns and continued uncertainty.
With regard to fiscal and monetary policy, Bernanke pointed to the recent projection by the members of the Board and the presidents of the Federal Reserve Banks that economic activity in 2012 will expand at or somewhat above the pace registered in the second half of last year. Their projections for growth in real GDP this year, provided in conjunction with the January meeting of the Federal Open Market Committee (FOMC), have a central tendency of 2.2 percent to 2.7 percent, Bernanke said, adding that the forecasts were considerably lower than the projections they made last June.
A number of factors have played a role in this reassessment, he said.
“First, the annual revisions to the national income and product accounts released last summer indicated that the recovery had been somewhat slower than previously estimated,” he said. “In addition, fiscal and financial strains in Europe have weighed on financial conditions and global economic growth, and problems in U.S. housing and mortgage markets have continued to hold down not only construction and related industries, but also household wealth and confidence.”
Further, Bernanke said that higher oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.”
“Longer-term inflation expectations, as measured by surveys and financial market indicators, appear consistent with the view that inflation will remain subdued,” he said, indicating that the Fed expects to keep interest rates low into 2014.
Bernanke also touched on the euro zone crisis, noting that while progress has been made, significant challenges remain for Greece and Eurozone creditors. He also said that the Fed’s decision to help prevent strains in Europe from spilling over to the U.S. economy by agreeing to extend and modify the terms of its swap lines with other major central banks has helped. Additionally, Bernanke said that the European Central Bank’s program to extend three-year collateralized loans to European financial institutions was a positive step, as well as a new package of measures for Greece, which combines additional official-sector loans with a sizable reduction of Greek debt held by the private sector.
“However, critical fiscal and financial challenges remain for the euro zone, the resolution of which will require concerted action on the part of European authorities,” he said.
Bernanke also mentioned the statement of long-run goals and policy strategy that the FOMC issued at the conclusion of its January meeting, reaffirming the Fed’s commitment to statutory objectives of price stability and maximum employment.
Its purpose is to provide additional transparency and increase the effectiveness of monetary policy, he said.
“While maximum employment stands on an equal footing with price stability as an objective of monetary policy, the maximum level of employment in an economy is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market; it is therefore not feasible for any central bank to specify a fixed goal for the longer-run level of employment,” Bernanke said.
In his opening remarks, Chairman Tim Johnson (D-S.D.) said recent economic activity has given him reasons to be optimistic, highlighting recent employment and manufacturing data, but said there are still areas of concern. Johnson specifically spotlighted housing and the Euro Crisis as the most dangerous unresolved issues affecting the market, noting that the “ongoing housing slump” is imperiling the recovery. He said there are a variety of proposals to address the housing crisis, most of which do not require Congressional action, and urged the Agencies and government sponsored enterprises (GSE) to carefully consider all their options.
Ranking Member Richard Shelby (R-Ala.) said he is concerned with the lack of transparency that the Fed has demonstrated of late, noting that of the Board’s 47 meetings this year, only two were public. He also questioned the Fed’s commitment to its inflation goals, noting the potential conflict between the Fed’s other goal of keeping interest rates low. In closing, Shelby sharply criticized the Fed’s white paper on housing and subsequent speeches by Fed Governors touting principal reduction modifications on GSE loans, which he said contradicts the conservator’s mandate.
Question and Answer
Senator’s Jack Reed (D-R.I.), Mike Crapo (R-Ind.) and Bob Corker (R-Tenn.) all asked questions about the Volcker Rule. Bernanke said the Volcker Rule will not be finalized by July 21, attributing the delay to its complexity and the fact that it is a multi-agency rule. Bernanke added that there is no need for Congress to explicitly say the Volcker Rule will not go into effect on July 21, because it is apparent that “banks do not need to abide by a rule that does not exist.”
Reed asked Bernanke to comment on recent letters from foreign governments requesting preferential treatment of their sovereign debt under the Proposed Rule. Bernanke said the Europeans, Canadians, Japanese and others are concerned that they are being discriminated against because U.S. Treasuries are exempted from the rule. He said the main issue they are raising is that the Proposed Rule may affect the liquidity and effectiveness of their sovereign debt markets. He assured members that the Fed is looking at this “very seriously,” and said they are in close discussions with their counterparts in foreign countries. Corker followed up by asking why Treasuries were exempted from the Volcker Rule. Bernanke said Congress made that determination when it drafted Dodd-Frank, but attributed it to preserving the “depth and liquidity of the Treasuries market.”
Johnson asked Bernanke to identify reasons for the modest pace of economic expansion and to voice his opinion on the speed of the recovery. Bernanke said under normal circumstances, a sharp decline in the market is usually followed by a strong recovery, but leftover stresses in the banking sector from the 2008 recession and continued weakness in the housing market are putting downward pressure on the recovery. He added that the Euro Crisis and rising oil prices have also contributed to a recovery that has not been “as quick as [the Fed] would have hoped.”
Johnson also asked Bernanke whether he thought “drastic” spending cuts were needed to address the nation’s deficit. Bernanke said that the United States is currently on an unsustainable fiscal path that could result in an economic crisis in “15-20 years” if nothing is done. However, he said the recovery from the crisis in 2008 is not complete, economic growth has remained modest and unemployment remains high, acknowledging that drastic cuts “might not be wise in the near term.”
Shelby asked Bernanke if he is concerned with the banking sector’s current exposure to European sovereign debt. Bernanke said he is not particularly concerned with banks’ exposure to European sovereign debt, noting that bank’s direct exposure is limited and well hedged, but still has general concerns about the effect of the EU debt crisis on the banking sector. Shelby followed up by asking why the International Swaps and Derivatives Association (ISDA) has not declared Greece in default on its government bonds. Bernanke said the ISDA did not declare Greece in default because it has determined that negotiations between the Greek government and private bond holders have been voluntary. He added that the Greek government retroactively enacted “collective action clauses” which it could use in the future to force other private sector investors to take losses even if they haven’t agreed to the voluntary haircut, triggering another review by the ISDA.
Shelby also asked how the Fed plans to shrink its balance sheet, which has now grown to $2.9 trillion. Bernanke said the Fed has provided a detailed “exit plan” in the minutes of its most recent meeting, but generally, they plan on allowing some securities to run-off and in the longer-term, expect to start selling securities.
Reed praised the Fed for issuing their white paper on housing and asked Bernanke to elaborate on a section in the report highlighting short-term policies that could increase long-term value. Bernanke said that loans modifications, short sales and real estate-owned-to-rental programs are usually narrowly targeted programs, but the scale of the crisis, and the housing market’s poor response to record low interest rates, warrants expansion of these types of programs that have upfront costs, but will ultimately increase value in the future.
Reed also asked Bernanke to comment on the “substantially higher” liquidity ratios that European banks can bear under Basel III compared to U.S. banks. Bernanke said that “in principle we all agree to the same set of rules,” but the Fed has raised a couple questions on liquidity ratios. The ratio of risk-weighted assets to total assets is lower in Europe than the United States, he said, “and the question, therefore, is: Are European supervisors in some way allowing lower risk weights being put on comparable assets.” Bernanke said the Basel committee “takes this very seriously” and has a process underway to try to verify that the two continents are operating comparably. He said the other issue is that there is an EU directive in process that is not completely consistent with the Basel III agreements, but said it is not a final document. Bernanke assured members that the Fed is tracking the issue
Senator Mike Crapo (R-Ind.) asked Bernanke when it will be time for Congress to aggressively start dealing with the nation’s spending problem. Bernanke reiterated his appeal for Congress to adopt a long term plan, telling members that Congress has not taken the necessary actions to put the nation on a “glide path” to fiscal responsibility. He said that while immediate cuts may not be beneficial, Congress could take “strong actions to unfold over a longer period of time.”
Senator Robert Menendez (D-N.J.) asked Bernanke how the Fed’s quantitative easing policies and Operation Twist have promoted economic growth. Bernanke said it is hard to attribute current economic growth to specific policies, but pointed out that 2010 predictions of high inflation and low growth have proven to be wrong. Further, he said the “2 million plus jobs added, low inflation, and steady economic growth indicate that the record on these tools is positive.”
Menendez asked Bernanke if he agreed with the administration that principle reduction should be used on Fannie and Freddie portfolios. Bernanke said the Fed has no official position on the subject, but stated that the decision to utilize principle reduction depends on the stated goals.
Senator Daniel Akaka (D-Hawaii) asked Bernanke to identify the greatest threats to the recovery. Bernanke said the Fed is most concerned with the EU debt crisis, rising oil prices, the continued weakness in the housing market, and the deficit.
Senator Jim DeMint (R-S.C.) asked if balancing the budget in 10 years would put the nation on the right fiscal path. Bernanke said he would advise Congress to eliminate the primary deficit in 10-15 years, at a minimum, and then start addressing interest payments.
Senator David Vitter (R-La.) asked Bernanke to address the negatives effects of maintaining a near zero interest-rate policy. Bernanke said there are a number of issues, including smaller returns to savers, lower pension fund contributions, and the possibility to create financial bubble. He added that a strong economy trumps the negative effects of low interest rates on savers and pension funds, and the upgrades to the Fed have made them more capable of counteracting the emergence of bubbles.
Senator Charles Schumer (D-N.Y.) asked Bernanke to address the risks to the economy and financial system if money market funds (MMF) are fundamentally altered. Bernanke praised the work the Securities and Exchange Commission has done on MMFs, highlighting their work on improving liquidity requirements. He said the Fed still sees risks with MMFs, “in particular their susceptibility to runs,” and reminded members that one of the implications of Dodd-Frank is that the Fed will not have the same tools to intervene if a fund “breaks the buck” and the Treasury can no longer provide ad-hoc insurance.
Further, he said the Fed supports the SEC’s attempts to find alternatives to MMFs, and said he expects them to release a “number of alternative strategies,” highlighting proposals to increase the capital base of the funds and restricting the ability of investors to draw funds immediately.
For testimony and a webcast of the hearing, please click here.
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At a Senate Banking Committee hearing on March 1, Federal Reserve Chairman Ben Bernanke delivered the Fed’s semiannual monetary policy report and offered remarks that mirrored his testimony during yesterday’s House Financial Services Committee hearing.
In his testimony, Bernanke said the pace of expansion has been “uneven and modest” by historical standards.
He said private payroll employment has increased by an average of 165,000 jobs per month since the middle of last year, and nearly 260,000 new private-sector jobs were added in January, but, in the public sector, layoffs by state and local governments have continued and overall, high unemployment rates will continue.
“The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its longer-term trend; continued improvement in the job market is likely to require stronger growth in final demand and production,” Bernanke said. “Notwithstanding the better recent data, the job market remains far from normal: The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high.”
On housing, Bernanke said that while prices have come down, “increasing affordability dramatically,” many potential buyers lack the down payment and credit history required to qualify for loans while others are reluctant to buy a house because of economic concerns and continued uncertainty.
With regard to fiscal and monetary policy, Bernanke pointed to the recent projection by the members of the Board and the presidents of the Federal Reserve Banks that economic activity in 2012 will expand at or somewhat above the pace registered in the second half of last year. Their projections for growth in real GDP this year, provided in conjunction with the January meeting of the Federal Open Market Committee (FOMC), have a central tendency of 2.2 percent to 2.7 percent, Bernanke said, adding that the forecasts were considerably lower than the projections they made last June.
A number of factors have played a role in this reassessment, he said.
“First, the annual revisions to the national income and product accounts released last summer indicated that the recovery had been somewhat slower than previously estimated,” he said. “In addition, fiscal and financial strains in Europe have weighed on financial conditions and global economic growth, and problems in U.S. housing and mortgage markets have continued to hold down not only construction and related industries, but also household wealth and confidence.”
Further, Bernanke said that higher oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.”
“Longer-term inflation expectations, as measured by surveys and financial market indicators, appear consistent with the view that inflation will remain subdued,” he said, indicating that the Fed expects to keep interest rates low into 2014.
Bernanke also touched on the euro zone crisis, noting that while progress has been made, significant challenges remain for Greece and Eurozone creditors. He also said that the Fed’s decision to help prevent strains in Europe from spilling over to the U.S. economy by agreeing to extend and modify the terms of its swap lines with other major central banks has helped. Additionally, Bernanke said that the European Central Bank’s program to extend three-year collateralized loans to European financial institutions was a positive step, as well as a new package of measures for Greece, which combines additional official-sector loans with a sizable reduction of Greek debt held by the private sector.
“However, critical fiscal and financial challenges remain for the euro zone, the resolution of which will require concerted action on the part of European authorities,” he said.
Bernanke also mentioned the statement of long-run goals and policy strategy that the FOMC issued at the conclusion of its January meeting, reaffirming the Fed’s commitment to statutory objectives of price stability and maximum employment.
Its purpose is to provide additional transparency and increase the effectiveness of monetary policy, he said.
“While maximum employment stands on an equal footing with price stability as an objective of monetary policy, the maximum level of employment in an economy is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market; it is therefore not feasible for any central bank to specify a fixed goal for the longer-run level of employment,” Bernanke said.
In his opening remarks, Chairman Tim Johnson (D-S.D.) said recent economic activity has given him reasons to be optimistic, highlighting recent employment and manufacturing data, but said there are still areas of concern. Johnson specifically spotlighted housing and the Euro Crisis as the most dangerous unresolved issues affecting the market, noting that the “ongoing housing slump” is imperiling the recovery. He said there are a variety of proposals to address the housing crisis, most of which do not require Congressional action, and urged the Agencies and government sponsored enterprises (GSE) to carefully consider all their options.
Ranking Member Richard Shelby (R-Ala.) said he is concerned with the lack of transparency that the Fed has demonstrated of late, noting that of the Board’s 47 meetings this year, only two were public. He also questioned the Fed’s commitment to its inflation goals, noting the potential conflict between the Fed’s other goal of keeping interest rates low. In closing, Shelby sharply criticized the Fed’s white paper on housing and subsequent speeches by Fed Governors touting principal reduction modifications on GSE loans, which he said contradicts the conservator’s mandate.
Question and Answer
Senator’s Jack Reed (D-R.I.), Mike Crapo (R-Ind.) and Bob Corker (R-Tenn.) all asked questions about the Volcker Rule. Bernanke said the Volcker Rule will not be finalized by July 21, attributing the delay to its complexity and the fact that it is a multi-agency rule. Bernanke added that there is no need for Congress to explicitly say the Volcker Rule will not go into effect on July 21, because it is apparent that “banks do not need to abide by a rule that does not exist.”
Reed asked Bernanke to comment on recent letters from foreign governments requesting preferential treatment of their sovereign debt under the Proposed Rule. Bernanke said the Europeans, Canadians, Japanese and others are concerned that they are being discriminated against because U.S. Treasuries are exempted from the rule. He said the main issue they are raising is that the Proposed Rule may affect the liquidity and effectiveness of their sovereign debt markets. He assured members that the Fed is looking at this “very seriously,” and said they are in close discussions with their counterparts in foreign countries. Corker followed up by asking why Treasuries were exempted from the Volcker Rule. Bernanke said Congress made that determination when it drafted Dodd-Frank, but attributed it to preserving the “depth and liquidity of the Treasuries market.”
Johnson asked Bernanke to identify reasons for the modest pace of economic expansion and to voice his opinion on the speed of the recovery. Bernanke said under normal circumstances, a sharp decline in the market is usually followed by a strong recovery, but leftover stresses in the banking sector from the 2008 recession and continued weakness in the housing market are putting downward pressure on the recovery. He added that the Euro Crisis and rising oil prices have also contributed to a recovery that has not been “as quick as [the Fed] would have hoped.”
Johnson also asked Bernanke whether he thought “drastic” spending cuts were needed to address the nation’s deficit. Bernanke said that the United States is currently on an unsustainable fiscal path that could result in an economic crisis in “15-20 years” if nothing is done. However, he said the recovery from the crisis in 2008 is not complete, economic growth has remained modest and unemployment remains high, acknowledging that drastic cuts “might not be wise in the near term.”
Shelby asked Bernanke if he is concerned with the banking sector’s current exposure to European sovereign debt. Bernanke said he is not particularly concerned with banks’ exposure to European sovereign debt, noting that bank’s direct exposure is limited and well hedged, but still has general concerns about the effect of the EU debt crisis on the banking sector. Shelby followed up by asking why the International Swaps and Derivatives Association (ISDA) has not declared Greece in default on its government bonds. Bernanke said the ISDA did not declare Greece in default because it has determined that negotiations between the Greek government and private bond holders have been voluntary. He added that the Greek government retroactively enacted “collective action clauses” which it could use in the future to force other private sector investors to take losses even if they haven’t agreed to the voluntary haircut, triggering another review by the ISDA.
Shelby also asked how the Fed plans to shrink its balance sheet, which has now grown to $2.9 trillion. Bernanke said the Fed has provided a detailed “exit plan” in the minutes of its most recent meeting, but generally, they plan on allowing some securities to run-off and in the longer-term, expect to start selling securities.
Reed praised the Fed for issuing their white paper on housing and asked Bernanke to elaborate on a section in the report highlighting short-term policies that could increase long-term value. Bernanke said that loans modifications, short sales and real estate-owned-to-rental programs are usually narrowly targeted programs, but the scale of the crisis, and the housing market’s poor response to record low interest rates, warrants expansion of these types of programs that have upfront costs, but will ultimately increase value in the future.
Reed also asked Bernanke to comment on the “substantially higher” liquidity ratios that European banks can bear under Basel III compared to U.S. banks. Bernanke said that “in principle we all agree to the same set of rules,” but the Fed has raised a couple questions on liquidity ratios. The ratio of risk-weighted assets to total assets is lower in Europe than the United States, he said, “and the question, therefore, is: Are European supervisors in some way allowing lower risk weights being put on comparable assets.” Bernanke said the Basel committee “takes this very seriously” and has a process underway to try to verify that the two continents are operating comparably. He said the other issue is that there is an EU directive in process that is not completely consistent with the Basel III agreements, but said it is not a final document. Bernanke assured members that the Fed is tracking the issue
Senator Mike Crapo (R-Ind.) asked Bernanke when it will be time for Congress to aggressively start dealing with the nation’s spending problem. Bernanke reiterated his appeal for Congress to adopt a long term plan, telling members that Congress has not taken the necessary actions to put the nation on a “glide path” to fiscal responsibility. He said that while immediate cuts may not be beneficial, Congress could take “strong actions to unfold over a longer period of time.”
Senator Robert Menendez (D-N.J.) asked Bernanke how the Fed’s quantitative easing policies and Operation Twist have promoted economic growth. Bernanke said it is hard to attribute current economic growth to specific policies, but pointed out that 2010 predictions of high inflation and low growth have proven to be wrong. Further, he said the “2 million plus jobs added, low inflation, and steady economic growth indicate that the record on these tools is positive.”
Menendez asked Bernanke if he agreed with the administration that principle reduction should be used on Fannie and Freddie portfolios. Bernanke said the Fed has no official position on the subject, but stated that the decision to utilize principle reduction depends on the stated goals.
Senator Daniel Akaka (D-Hawaii) asked Bernanke to identify the greatest threats to the recovery. Bernanke said the Fed is most concerned with the EU debt crisis, rising oil prices, the continued weakness in the housing market, and the deficit.
Senator Jim DeMint (R-S.C.) asked if balancing the budget in 10 years would put the nation on the right fiscal path. Bernanke said he would advise Congress to eliminate the primary deficit in 10-15 years, at a minimum, and then start addressing interest payments.
Senator David Vitter (R-La.) asked Bernanke to address the negatives effects of maintaining a near zero interest-rate policy. Bernanke said there are a number of issues, including smaller returns to savers, lower pension fund contributions, and the possibility to create financial bubble. He added that a strong economy trumps the negative effects of low interest rates on savers and pension funds, and the upgrades to the Fed have made them more capable of counteracting the emergence of bubbles.
Senator Charles Schumer (D-N.Y.) asked Bernanke to address the risks to the economy and financial system if money market funds (MMF) are fundamentally altered. Bernanke praised the work the Securities and Exchange Commission has done on MMFs, highlighting their work on improving liquidity requirements. He said the Fed still sees risks with MMFs, “in particular their susceptibility to runs,” and reminded members that one of the implications of Dodd-Frank is that the Fed will not have the same tools to intervene if a fund “breaks the buck” and the Treasury can no longer provide ad-hoc insurance.
Further, he said the Fed supports the SEC’s attempts to find alternatives to MMFs, and said he expects them to release a “number of alternative strategies,” highlighting proposals to increase the capital base of the funds and restricting the ability of investors to draw funds immediately.
For testimony and a webcast of the hearing, please click here.