Below are highlights from Federal Reserve Chairman Ben Bernanke's testimony on Tuesday on the state of the U.S. economy to the Senate Budget Committee. Bernanke's prepared testimony was virtually identical to testimony on Thursday to the House Budget Committee.
BERNANKE ON MONEY MARKET FUNDS:
There has been progress made both by banks and by money market mutual funds in reducing exposures and improving hedging but again I don't want this to be interpreted as a complacent statement. I think that if there is a major problem in Europe, the risk aversion, the volatility, the uncertainty - all of those things would have a powerful impact on our financial system.
BERNANKE ON THE IMPORTANCE OF LONG TERM FISCAL PLAN:
Its very clear ... the U.S. federal deficit will become unsustainable within 15 or 20 years at the most. Possibly some of those effects will even be brought forward by markets, for example. So, we clearly need some major changes in our fiscal planning and our fiscal path going forward. ... These are concerns which are not just about our children 20 years from now but they could have effects much sooner if markets begin to loose confidence in our nation's ability to stabilize our debt burden.
BERNANKE ON NEED TO MORE URGENTLY ADDRESS STRUCTURAL FISCAL ISSUES:
Certainly you do. In fairness to the hardworking people here, I would say that there is a lack of clarity to some extent among the general public. I think people have conflicting views about what they want. Everyone wants a lower deficit but nobody wants to lose their own program or their own tax cut. So it is difficult. I understand. But absolutely, I think we would all benefit from action to credibly and strongly articulate a plan that would bring our fiscal situation into sustainability over the next couple of decades.
BERNANKE ON U.S. BANKS EXPOSURE TO EURO ZONE BANKS:
Banks have made progress in protecting themselves against problems in European sovereign or bank debt. But I would agree that if there is a very substantial crisis or similar problem in Europe that, because there are so many channels in which that would flow to the financial system, our banks, our whole financial system would still be significantly affected.
BERNANKE ON IMPACT OF LOW RATES ON SAVERS:
There are single-mandate central banks like the Bank of England and the ECB that have policies very similar to the Fed. Given that inflation is close to target I don't think that we'd be doing a radically different thing if we had a single mandate at this particular point in time. We're quite aware of these costs and risks. ... With respect to savers, for example, it's true that low interest rates reduce the returns that savers get on their savings but I would make the general point that savers don't hold just, say, Treasury bonds. They also hold corporate debt and stocks and a variety of other securities and returns on those securities depend very importantly on the strength of the economy. So in trying to strengthen the economy we're helping to improve the returns to savers.
BERNANKE ON EFFECT OF FED POLICY ON TREASURY RATES:
I think that the effects of Fed policy, independent of the all the other factors, on Treasury rates is modest. And in any case, rates will rise, eventually. And if investors were to lose confidence in U.S. federal fiscal policy, there's nothing the Fed could do to prevent those rates from rising.
BERNANKE ON NEED FOR LONG-TERM PLAN TO REDUCE BUDGET DEFICIT:
This is a very long-term problem. It doesn't have to be done all today. On the other hand, gesturing towards the future without taking any concrete steps or credible steps is not going to be effective either. So, I think the more you can demonstrate a will and commitment to sustainability over the longer term - by which I mean at least 10 years but beyond that if possible - the more flexibility there will be to address near-term concerns relating to the recovery and so on over the next two to three years. But you need both.
Just simply promising future action risks at least an adverse market reaction, an adverse reaction in terms of confidence and so on.
We're looking still at a couple more years of recovery, but there's nothing that stops us from very soon also laying out in some detail and with some commitment what the longer-term plan is to address the fiscal problem.
BERNANKE ON DUAL MANDATE:
We are not going to seek higher inflation in order to advance unemployment. ... You could have shocks that would drive both objectives away from their target, in which case in a very symmetrical way we would be returning both parts of the mandate towards the target. But we have to take into account the other part of the mandate. It could affect the speed at which we return inflation to target, but by the same token if inflation is high it could affect the speed at which we return employment to target. There has to be some interaction of those two things.
BERNANKE ON EMPLOYMENT TREND:
Our forecasts are for unemployment to continue to decline moderately. We see growth at something close to potential, which under normal circumstances would mean that we are creating enough jobs to employ new entrants to the labor force but not making sharp improvements on the unemployment rate.
BERNANKE ON EFFECT OF DROP IN U.S. EXPORTS TO EU:
We've already seen some decline in exports to Europe, although exports to Europe are about 2 percent of our GDP so it's not totally make-or-break. But it is an influence.
BERNANKE ON CONSUMER CONFIDENCE:
If you look at the consumer confidence surveys, people are saying that they don't expect to see their real incomes grow. They expect that their financial situations are going to be flat to down in the next few years. And that's not a situation that encourages people to buy a house or start a business or anything like that.
BERNANKE ON POTENTIAL IMPACT OF OIL SUPPLY DISRUPTION:
As we saw in a modest way early last year, a significant increase in oil prices can be very disruptive, both because it creates inflation and also because it acts like a tax on consumers. ... A major disruption that sent oil prices up very substantially could stop the recovery.
That being said, I think one of the more encouraging things of the last several years is the fact that with new processes and approaches, the U.S. is becoming a much more prolific producer of fossil fuels and is also making progress on non-fossil forms of energy. For the first time in some time I think there's a chance we can move in the right direction in reducing our exposure to foreign supply disruptions.
BERNANKE ON TIMING, CREDIBILITY OF GETTING FISCAL SITUATION UNDER CONTROL:
The cumulative effect of all these different things - (the) expiration of the payroll tax, the sequestration, expiration of the Bush tax cuts and other things - collectively would be a fairly sharp change in the near term fiscal position. I'm not saying don't pay for it. I'm just saying do it over a longer period of time, and do it seriously. I agree with Senator Sessions' concern that it's just push it off (to) manana. You don't want to do that. You want to make a credible strong plan, but one that phases in over a period so the economy will not hit a huge pothole.
BERNANKE ON ENTITLEMENT SPENDING:
Under the current plans if there's no change to our entitlement programs, then the demand for spending, the amount of spending the government is committed to, is going to rise. ... So at some point Congress is going to have to make a tradeoff between what its spending programs are and what taxes it's willing to raise. I've often said I'm in favor of the law of arithmetic: if you want a low-tax economy which has benefits from (an) efficiency perspective, then you've got to make the tough decisions on the spending side. And vice versa if you want to spend more you've got to figure out how to raise the revenue. I'd mainly try to urge Congress to make sure they're looking at both sides so there's a balance between the two.
BERNANKE ON NEED TO LOOK BEYOND 10 YEARS IN CUTTING BUDGET DEFICIT:
We need a long-term plan to put our debt to GDP ratio, our overall fiscal burden on a sustainable path.
BERNANKE ON UNEMPLOYMENT:
We are concerned that over the past few years that there has been some modest increase in the sustainable rate of unemployment. One of the factors contributing to that is the fact that about 40 percent of the unemployed have been unemployed for six months or more and those folks lose skills, they lose attachment to the labor force. It makes it difficult for them to find steady employment in the longer-term. Monetary policy really cannot do much to bring unemployment in a sustainable way below those levels. Other policies affecting skills, the structure of the labor market, fiscal policy and trade, all kinds of other policy could affect and bring down that sustainable rate of unemployment and I hope Congress will consider ways to address that problem.
BERNANKE ON IMPACT OF LOOMING TAX INCREASE IN 2013:
I don't know exactly when uncertainty would become a factor, but surely when we get closer to January 1st and Congress has not given a clear roadmap for how it plans to proceed, that would certainly effect planning - business decisions, household decisions - as they look ahead to next year.
BERNANKE ON THE INFLATION OUTLOOK:
The energy price increases of early last year have not recurred. Our projections are that inflation is going to remain very subdued, probably below our 2 percent target going into 2012 and 2013. So, because monetary policy works with a lag we have to think about where inflation is going to be, not where it has been in the past. Inflation has averaged about 2 percent a year over my tenure as chairman and we expect it to be at 2 percent or below in the next couple of years. So we think that is entirely consistent with an accommodative policy.
BERNANKE ON FED'S ADOPTION A 2 PCT INFLATION TARGET:
I want to disabuse any notion that there is a priority for maximum employment. We say very explicitly, we take a balanced approach. Congress gave us a dual mandate. We work to bring both sides of the mandate back towards the target. The main goal of that statement was not to announce any change in policy. The main goal was to give greater clarity about how we define these long-run objectives. But we are certainly going to be working to bring both parts of mandate towards desired levels.