The following are highlights from a House of Representatives Budget Committee hearing on Wednesday with Federal Reserve Chairman Ben Bernanke testifying. For text of prepared testimony, click on
FROM Q&A WITH LAWMAKERS
BERNANKE ON TIMING OF REDUCING GOV'T SPENDING
In terms of the time frame, right now, I don't think is the time, this very moment is not the time, to radically reduce our spending, or raise our taxes, because the economy is still in recovery mode and needs that support. However, the risk of course of ongoing deficits is the potential loss of confidence in markets and the way to reassure the markets is by creating a plausible plan for a medium-term stability in the fiscal situation. Obviously you can't run deficits (of) 10 percent of GDP forever.
BERNANKE ON U.S. DOLLAR'S ROLE AS RESERVE CURRENCY
The dollar is still the dominant reserve currency and U.S. Treasuries obviously are very attractive as you can see from the increase in their prices during the recent turmoil.
So the U.S. dollar has been a safe-haven currency where investors have gone when they've been concerned about other currencies and other economies.
BERNANKE ON COMMERCIAL REAL ESTATE
We are concerned about it, it clearly is a very weak point in the economy. For many banks, including small and medium-sized banks, it is a problem. We have done a number of things. The Federal Reserve, working with the Treasury, has developed programs to try to restart the commercial mortgage-backed securities markets. Beyond that we have issued guidance to banks on commercial real estate and we're trying to work with them to restructure commercial real estate loans and to find ways to manage in terms of loans, so we're doing the best we can with banks and with the markets. There seems to be, I would say, a few glimmers of hope in this area, some stabilization of prices in some markets, for example, but it does remain a serious concern and we're watching it very carefully.
BERNANKE ON FISCAL BREATHING ROOM
Countries have different amounts of fiscal capacity if you will. Countries like Greece, which are clearly being shut out from the market because of their debt and deficit ratios, need immediate and sharp changes in their position. The United States, as I said in my remarks, is favored in that we are a safe-haven currency. We are a large, diversified economy and we have a long record of paying our debts, paying our interest. So we have a little more breathing space -- but potentially. But I don't know exactly how much (space) we have, and I'm going to try to say -- I don't disagree with you -- you said we need a program for returning our trajectory of fiscal policy to a sustainable path.
BERNANKE ON BANKERS' PAY PACKAGES
We will be pushing the banks to move as quickly as possible to restructure their compensation packages so that they will not be engendering excessive risk-taking. So we will be doing that very quickly.
We hope to have a public report about this near the end of the year, early next year, but I want to assure you that the actions we will be taking will not wait for the report. We will be immediately working with the banks, and we have been working with banks already, to get them to modify their compensation practices.
The structure of the compensation packages needs to change so that there's not an incentive to take excessive risks. Packages where the trader gets all the upside and none of the downside, that's the kind of thing we're trying to get rid of.
BERNANKE ON GOLD PRICE
Gold is out there doing something different from the rest of the commodity group. I don't fully understand the movements in the gold price, but I do think that there's a great deal of uncertainty and anxiety in financial markets right now. Some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point.
BERNANKE ON EUROPEAN ACTIONS
I am encouraged by the response of the Europeans ... I think the markets remain uncertain about whether these measures will be successful and that's why you're still seeing a lot volatility in the markets. What I can assure you of is that the European leadership is fully committed to addressing this problem, preserving the euro zone and preserving the European Union and they are working, I think, very aggressively right now to try to establish some effective solutions.
BERNANKE ON RECOVERY, DOUBLE DIP RISK
It appears to us that the recovery has made an important transition from being supported primarily by inventory dynamics and by fiscal policy toward recovery being led now more by private final demand, including consumer spending. That is encouraging in terms of the sustainability.
Our current most likely outlook is that the economy will continue to recover at a moderate pace... A double dip never can be entirely ruled out, of course, but right now our expectation is the economy will continue to grow at around a 3 to 4 percent pace this year.
FROM BERNANKE'S PREPARED TESTIMONY
ON GROWTH, INFLATION OUTLOOK
The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year. Moreover, the economy--supported by stimulative monetary policy and the concerted efforts of policymakers to stabilize the financial system--appears to be on track to continue to expand through this year and next. The latest economic projections of Federal Reserve Governors and Reserve Bank presidents, which were made near the end of April, anticipate that real gross domestic product (GDP) will grow in the neighborhood of 3-1/2 percent over the course of 2010 as a whole and at a somewhat faster pace next year. This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued.
Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity.
ON CONSTRAINTS TO GROWTH
Significant restraints on the pace of the recovery remain. In the housing market, sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit. Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions. Meanwhile, pressures on state and local budgets, though tempered somewhat by ongoing federal support, have led these governments to make further cuts in employment and construction spending.
ON EFFECTS OF EUROPEAN DEBT CRISIS
The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities. The Federal Reserve will remain highly attentive to developments abroad and to their potential effects on the U.S. economy.