Below are highlights from the question and answer session of Federal Reserve Chairman Ben Bernanke's testimony on Thursday on the state of the U.S. economy to the House Budget Committee.
BERNANKE ON HAVING TOOLS TO WITHDRAW EASING WHEN APPROPRIATE
We're not concerned (about being able to control inflation when economy picks up steam). We have two broad sets of tools to remove the money at the appropriate time. One is simply to sell assets, which extinguishes the money. The other is to use a variety of tools we've developed to sterilize, or essentially remove that, either lock up or remove those excess reserves from the banking system.
BERNANKE ON ARGUMENTS FOR LOW CAPITAL GAINS TAX RATES
I don't want to be pinned down on a simple response because on the one hand, the low tax on investment income, as I said, can be justified by economic theory.
It can be justified by arguments to the need for personal, corporate tax integration and so on.
But I think Congress has an appropriate task to try to balance whatever benefits that low taxes on capital income have against considerations of equity, considerations of implementation ....
So there's some complex issues on both sides.
BERNANKE ON EUROPEAN DEBT CRISIS
There have been a couple of positive developments. The European Central Bank has provided extensive financing to the European banking system and will provide another round of financing at the end of this month. That has had the benefit of reducing some of the stresses of the banking system, even gone so far as bring down to some extent the borrowing costs of some of the more fiscally troubled countries as well.
That has taken away some of the financial stress and given it a little more breathing space.
The banking system remains undercapitalized, it has been contracting its credit and contributing to a weakening of economies in many countries in Europe.
It is important to conclude that there are still deep fundamental problems, not just fiscal issues, slow growth issues, but also issues of competitiveness.
All those things put together mean that you could have very slow growth in some European countries for quite a while.
BERNANKE ON RISK OF MASSIVE FISCAL HIT IN 2013
Under current law, there's going to be a massive fiscal contraction in 2013. Without addressing any of the specific policies involved, I think Congress should be aware of that and try to avoid having too big a hit on the recovery in 2013.
BERNANKE ON HOUSING
One of the main reasons that the recovery has been as disappointing as it has been is usually housing provides an important amount of impetus to growth, not just construction but all the related industries and services that are tied to housing. In this case, housing has been very weak. The recovery in housing would be a very important boost to the overall recovery. It works through a number of different ways, not just construction, but by affecting the wealth of consumers and their financial well being. The mortgage market, the problems with access to credit, for example mean that the Federal Reserve monetary policies are less effective than otherwise would be.
BERNANKE ON NEED FOR LONGER VIEW
A very substantial additional attack on deficits is needed. But the other point I would make is that the $4 trillion (2.53 trillion pounds) to $6 trillion number is about the next decade. The biggest problems we have are beyond the next decade. They stretch out into the next 20 or 30 years as entitlement costs in particular begin to rise and as our demographics begin to move, I guess some would say, adversely. So one thing I would urge you is not to just focus only on the 10-year official budget window but to think about the longer term, even beyond 10 years....The bad case scenario, which ultimately will happen if we don't change this trajectory, is that, analogous to what we've seen in some countries in Europe, that investors will begin to lose confidence that we can manage our long-term fiscal situation and we'll see sharp movements in interest rates or loss of confidence in U.S. debt, in which case changes would have to be made but in a much more chaotic, rapid and disruptive way than by doing it in a long-term thoughtful way.
BERNANKE ON FED WHITE PAPER ON HOUSING POLICY
The Fed has a lot of interest in housing. It is important for the economy, it is important for monetary policy, we are bank supervisors so we're interested in mortgages and lending.
The bottom line is we have done a lot of work on this ... it was not the intent of that white paper to provide a set of recommendations. There was not a list of recommendations at the end of the white paper. We were trying to provide pros and cons, analysis and background. I'm sorry if you think we went too far.
BERNANKE ON EMPLOYMENT AND PRICE STABILITY
It's evident on the unemployment side that we would like to see (more) progress than we have seen. On the inflation side, at least for now, we appear to be very close to target. It is important to emphasize that monetary policy can't do everything, it's not a panacea and this body and others need to think about the troubled parts of the economy, places where improvements can be made, tax code or in other areas. We are obviously not satisfied with where we are and while we will continue to do all we can to meet our dual mandate, which is what Congress has given us, we hope that all of you and the administration will look for alternative ways to strengthen our economy.
BERNANKE ON DUAL MANDATE WORKING FINE
I think...the dual mandate has worked fine..we have as good an inflation record as any other central bank. I don't think it's been a major problem. So I think it's served us well. That being said, Congress created the Fed, Congress gave us our mandate. If you determine that you want to change it, we will of course do whatever you assign us to do.
BERNANKE ON MORE AGGRESSIVE DEFICIT STRATEGIES
I want to be very clear, I don't want anyone to interpret me as saying anything other than that this Congress has a very difficult and important job to address the long-term fiscal sustainability of our federal budget. That's a critical thing. I think that even more aggressive strategies than have been pursued recently are warranted over the longer term but I also think that that could be done in a way which is persuasive to markets and achieves those objectives but doesn't quite jolt the recovery -- doesn't do it all at once. I think that as long as there's a credible, strong plan over time..and we move into that plan that we'll achieve most of the objectives of fiscal sustainability but we need to at least avoid doing harm. I would say do no harm is an important piece of advice that I would offer you.
BERNANKE ON THE DOLLAR BEING A SAFE HAVEN
Our policies are hardly unusual. At this point almost every industrial central bank, excluding Canada which had less of a recession than we did, has a large balance sheet and low interest rates, including the ones with single mandates.
I think the basic reason for low long-term rates, which are also a feature of every other industrial economy, are low inflation, slow expected growth and the fact that the dollar is a safe haven. And with problems in the world, people are investing in U.S. Treasuries because they're attractive.
BERNANKE ON CONTROLLING INFLATION
We're always trying to bring inflation back to the target. The only sense in which there's a balance, of course, is that in looking at the two sides of the mandate the rate of speed, the aggressiveness, may depend to some extent on the balance between the two objectives. But we're always trying to return both objectives back to their mandate. We are not seeking higher inflation, we do not want higher inflation and we're not tolerating higher inflation.
BERNANKE ON INFLATION BEING UNDER CONTROL
The two sides of the mandate are generally complementary, we agree that low stable inflation is good for the economy, it's good for growth. Inflation currently, it looks to be very well controlled, our expectation is that inflation will be below target for the next couple of years. Of course unanticipated events can happen. The dollar has been pretty stable.