The following are highlights from Federal Reserve Chairman Ben Bernanke's testimony on the economy to the House Budget Committee on Wednesday.
BERNANKE ON GSE REFORM:
As you know, the Treasury is promising us a set of proposals very soon. It'll be interesting to see what they provide. There's various possibilities that we could do, including making them a government utility or privatizing them, which would be two alternatives. One suggestion which I have made in previous remarks is that if the government is involved in providing credit guarantees, they should do so only as a deep backstop -- that is, the first losses should be borne by the originators of the mortgages or by the securitizers. The government, if it does provide backstop insurance, should do so for an actuarially fair fee, premium, and that would essentially allow the government to provide backstop in situations like we had in the last few years where the housing market comes under enormous stress.
BERNANKE ON CYCLICAL VERSUS STRUCTURAL UNEMPLOYMENT:
I don't have a precise number, but we have done a lot of work looking at this. And I would say the bulk of it is still cyclical. The risk is that if it goes on long enough, it will start becoming structural as people loose their skills and their connection to the labor force.
BERNANKE ON OVERALL U.S. INFLATION BEING LOW:
There should be no doubt that we are unwaveringly committed to maintaining price stability....In terms of what we are looking at, first of all, overall inflation, including food and energy is still very low, about 1 percent. But looking forward, you ask about the yield curve. If you look, for example, at inflation break-evens which are a measure in the inflation-index bond market of what the market thinks inflation is going to be, the five-year break is about 2.1 percent, last time I looked. So there is not really any indication in our financial markets that in the United States there is an expectation of inflation. That being said, we look very seriously at output gaps, but also at commodity prices and all the other indicators that will help us assess when inflation is becoming a problem.
BERNANKE ON INFLATION IN EMERGING MARKETS:
The inflation is taking part in emerging markets because that's where the growth is, that's where the demand is and that's where in some cases the economies are overheating. It's the responsibility of the emerging markets to set their monetary and exchange rate policies in a way that will keep their economies on a stable path.
The increases in oil prices, for example, are entirely due -- according to the International Energy Agency -- to increases in demand coming from emerging markets, they're not coming from the United States. So the bulk of the increase in commodity prices is a global phenomenon. In the United States inflation made in the U.S. is very, very low. Of course that's a serious problem but monetary policy can't do anything about, say, bad weather in Russia or increases in demand for oil in Brazil and China. What we can do is try to get stable prices and growth here in the United States.
HOUSE BUDGET COMMITTEE CHAIRMAN PAUL RYAN ON SOUND MONEY:
We must not neglect the sound money part of the equation.
My concern is that the costs of the Fed's current monetary policy -- the money creation and massive balance sheet expansion -- will come to outweigh the perceived short-term benefits.
We are already witnessing a sharp rise in a variety of key global commodity and basic material prices, and we know that some producers and manufacturers here in the United States are starting to feel cost pressures as a result.
For the sake of our economy in particular and the global recovery as a whole, it is vital that we focus on dollar stability if we are to prevent the kind of beggar-thy-neighbor currency conflicts that can destroy economic recoveries.
There is nothing more insidious that a country can do to its citizens than debase its currency.
FROM BERNANKE'S TEXT
BERNANKE ON JOBS:
Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will 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 truly established.
BERNANKE ON INFLATION:
Overall inflation is still quite low and longer-term inflation expectations have remained stable. ... Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.7 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.
BERNANKE ON BOND-BUYING PROGRAM:
My colleagues and I have said that we will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. In particular, we remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time.
BERNANKE ON ACTING NOW TO REDUCE BUDGET DEFICIT:
Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation. Although these proposals differ on many details, they demonstrate that realistic solutions to our fiscal problems do exist.