The following are highlights from Federal Reserve Chairman Ben Bernanke's testimony to the Senate Banking Committee on Tuesday on the central bank's semi-annual report on U.S. monetary policy.
FROM QUESTION AND ANSWER SESSION:
BERNANKE ON FISCAL IMBALANCES:
The long-term imbalances are not just a long-term risk. They're a near and present danger. To the extent that markets lose confidence in the Congress's ability to make tough choices -- and they're going to be tough -- there is the risk of an increase in interest rates which would just make things worse.
BERNANKE ON SIGNS QE2 IS WORKING TO BOOST GROWTH:
The current QE...appears to have had the desired effects on markets in terms of creating stimulus for the economy.
And I cited not just Federal Reserve forecasts but private sector forecasts which have almost uniformly been upgraded since August, since November, suggesting that private sector forecasters are seeing more growth and more employment this year than they had previously expected.
So I think it is in fact having benefits for growth and employment.
On the inflation side, as I have said before, I think the bulk of the commodity price movements are not resulting from Federal Reserve policy but are resulting from global supply and demand factors.
BERNANKE ON GDP HIT FROM SPENDING CUTS:
In terms of growth numbers, there would be an effect this year of a tenth or two (percentage point of GDP) and then there would be an additional effect in 2012.
BERNANKE ON WHEN THE FED WILL WITHDRAW STIMULUS
Monetary policy works with a lag and therefore we can't wait until we get to full employment and, you know, the target inflation rate before we start to tighten. We have to think in advance. Which means, we have to use our models and our other forms of analysis, and market indicators and so on to try to project where the economy is heading over the next six to twelve months.
Once we see the economy is in a self-sustaining recovery and employment is beginning to improve and labor markets are improving, and meanwhile that inflation is stable, approaching roughly 2 percent or so ... at that point we'll need to begin withdrawing... It's not at all different from the problem central banks always face, which is when to take away the punch bowl, and the only way you can do that is by making projections of the economy and moving sufficiently in advance that you don't stay too easy for too long.
We're quite aware of this issue and quite committed to price stability and we will continue to analyze our models and our forecasts and move well in advance of the time that the economy is completely back to full employment.
BERNANKE ON IMPACT ON YIELDS OF ENDING QE2:
We learned in the first quarter of last year, when we ended our previous (easing) program, that the markets had anticipated that adequately and we didn't see any major impact on interest rates. And so I don't expect when the time comes for us to end the program that we'll see a big impact. I think it's really the total amount of holdings rather than the flow of new purchases that affects the level of interest rates.
BERNANKE ON HOW FED DECIDED ON $600 BILLION FOR QE2:
We have tried through a number of methods to establish a correspondence between these purchases and what our normal interest rate policies would be.
And a rule of thumb is that $150 to $200 billion in purchases seems to be roughly equivalent to a 25 basis point cut in the federal funds rate in terms of the simulative power for the economy.
So $600 billion is roughly a 75 basis point cut in the policy rate in terms of its broad impact.
Seventy-five basis points in normal times would be considered a very strong statement, a very powerful move, but not one outside the range of historical experience.
It would be one taken, that would be at a period of concern, and then we would observe the effect. So that was roughly the analysis that we did.
BERNANKE ON GAS PRICES:
My sense is that the increases that we've seen so far, while obviously a problem for a lot of people, do not yet pose a significant risk either to the recovery or to the maintenance of overall stable inflation. However, we'll just have to continue to watch and if we see any significant additional increases we'll obviously have to take that very seriously.
FROM PREPARED TEXT:
BERNANKE ON THE U.S. ECONOMY
We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold ... The combination of rising household and business confidence, accommodative monetary policy, and improving credit conditions seems likely to lead to a somewhat more rapid pace of economic recovery in 2011 than we saw last year.
BERNANKE ON THE U.S. JOB MARKET
We do see some grounds for optimism about the job market over the next few quarters, including notable declines in the unemployment rate in December and January, a drop in new claims for unemployment insurance and an improvement in firms' hiring plans. Even so, if the rate of economic growth remains moderate, as projected, it could be several years before the unemployment rate has returned to a more normal level ... Until we see a sustained period of stronger job creation, we cannot consider the recovery to be fully established.
BERNANKE ON INFLATION
Although overall inflation is low, since summer we have seen significant increases in some highly visible prices, including those of gasoline and other commodities. Notably, in the past few weeks, concerns about unrest in the Middle East and North Africa and the possible effects on global oil supplies have led oil and gasoline prices to rise further ... The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation -- an outlook consistent with the projections of both FOMC participants and most private forecasters. That said, sustained rises in the prices of oil and other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability.
BERNANKE ON QE2
My colleagues and I continue to regularly review the asset purchase program in light of incoming information, and we will adjust it as needed to promote the achievement of our mandate from the Congress of maximum employment and stable prices.
SENATE BANKING COMMITTEE CHAIRMAN JOHNSON ON FED'S DUAL MANDATE
While some critics have been very vocal, even going so far as to call for an end to the Fed's dual mandate, I believe you should be commended for your work. As the economy continues to struggle to recover, we should be using every tool in the toolbox to create jobs and spur growth. Taking tools away from the Fed now is the wrong idea at the wrong time.
(Compiled by Reuters' Washington Fed reporting team)