Below are highlights from the question and answer session of a Senate Banking Committee hearing with Federal Reserve Chairman Ben Bernanke testifying on monetary policy and the U.S. economy.
BERNANKE ON IMPACT OF QE MEASURES, DEFLATION
If you look back at Quantitative Easing 2, so called, in November 2010, concerns at the time were that it would be a high inflationary environment, it would hurt the dollar, it would not have much effect on growth, etcetera.
But since November 2010, we have had since then the QE2 and the so-called Operation Twist, we have had about 2-1/2 million jobs created, we have seen big gains in stock prices, we have seen big improvements in credit markets, the dollar is about flat, commodity prices excluding oil are not much changed, inflation is doing well in the sense that we are looking for about a 2 percent inflation rate this year.
And one other point, in November 2010, we had some concerns about deflation, and I think we have sort of gotten rid of those and brought ourselves back to a more stable inflation environment as well.
BERNANKE ON EUROPEAN CONCERN ABOUT VOLCKER RULE
The issue that the Europeans and the Canadians and the Japanese and others have raised is that because there is an exception for U.S. Treasuries but not for foreign sovereigns in the Volcker rule, they believe they're being discriminated against and that the Volcker rule might affect the liquidity and effectiveness of their sovereign debt markets. We take this very seriously, we're in close discussion with those counterparts and of course we will be looking carefully to see if changes are needed. We'll do what's necessary.
BERNANKE ON U.S. BANKS' EUROPEAN EXPOSURE
Our sense is that the direct exposures of U.S. banks to sovereign debt in Europe, particularly that of the weaker countries, is quite limited and is well hedged and that those hedges in turn are pretty good hedges - that the counterparties are diversified and financially strong. If you look at it more broadly, of course, our banks are exposed to European companies and banks, inevitably, they are major trading partners and major financial partners, and again they've been working hard to provide adequate hedges.
But let me just say I think it is very important to note that if there is a major financial problem in Europe, there will be so many different channels on which that will affect our financial system that I would not want to take too much comfort from that.
BERNANKE ON POTENTIAL GROWTH
We have had growth now since mid-2009 and unemployment has come down, but of course, growth is not as strong and the improvement in the unemployment rate is not as quick as obviously we would like.
The United States is on a unsustainable fiscal path looking out over the next couple of decades. If we continue along that path, eventually we will face a fiscal and financial crisis that will be very bad for growth and sustainability.
The recovery is not yet complete, unemployment remains high, the rate of growth is modest.
Generally, it's hard to predict, of course, what sectors will have the greatest growth in the longer term.
We do not see at this point that the very severe recession has permanently affected the growth potential of the U.S. economy. Although we continue to monitor productivity gains and the like.