In a statement before the Joint Economic Committee, Fed Chairman Ben Bernanke said the Fed “is prepared to take stronger action to promote a stronger economic recovery in the context of price stability.”
He cited Operation Twist as evidence that the Fed is willing to act in order to foster economic growth.
He told the committee that inflation is beginning to moderate, and that he’s not particularly worried about it even in the longer-term.
The markets did not make any huge strides on his speech, though they are recovering slightly. The Dow was off more than 2% in early trading, but is only down 1.65% right now.
These initial notes come from the published copy of his speech. We’re also covering his speech live, and are updating below.
UPDATE: Bernanke is blaming the debt ceiling, Europe, and government spending cuts for tightening credit conditions for households.
He says that there are four things the national and local governments should consider when thinking about spending.
– Fiscal sustainability
– Reducing deficits in the long term should not impede short-term recovery
– Fiscal policy should promote long term growth
– Clarity in decision-making to stabilise markets
UPDATE II: He has finished his speech and is now taking questions.
ON OPERATION TWIST
Bernanke says “the economy is close to faltering.” He is downplaying the effect of Operation Twist, saying that it should help but that it’s not a game-changer. He equates it to a 50bps cut in the Fed funds rate.
The chairman says that all the evidence points to Chinese currency being undervalued, and that the Chinese government’s “currency policy is blocking” global recovery.
Bernanke assures the committee that U.S. banks have minimal exposures to Greece, Portugal, and Ireland, though money market mutual funds have a little more.
“One of the reasons that our recovery is slower this year than last year is because of market volatility,” he says, “and some of that is coming from Europe.”
“We’re kind of innocent bystanders here,” Bernanke is saying. “The problems there are not really economic, they’re political…I don’t really have any other suggestions than to support [EU leaders’] efforts.”
Bernanke is emphasising the European Central Bank’s ability to provide capital to the banks.
He’s saying that Dodd-Frank has made it illegal for the Fed to lend directly to individual banks, but that it would be prepared to instigate a broad lending program should it see the possibility of a run on the banks (which, of course, he does not anticipate).
Bernanke says that if the ECB loses out, “they are responsible [for refunding U.S. dollars], not us.”
ON INCOME INEQUALITY
Bernie Sanders (I-VT) is quizzing Bernanke on income inequality, particularly on Wall Street. He sounds pretty angry. He asks, “why don’t we break [the 6 biggest financial institutions on Wall Street] up?”
Bernanke responds that income inequality is nothing new. He emphasises that Dodd-Frank introduces new regulations that limit the Fed’s authority to bail out financial institutions. Bernanke emphasised that policymakers should look at market conditions to decide how to handle these banks, but that if the government determined it was appropriate the Fed could break up banks that are “too big to fail.”
Bernanke notes that it will be difficult to create an alternative to mortgage giants Fannie Mae and Freddie Mac, and passes the buck off to Congress.
ON CORPORATE CASH
Bernanke says corporations have about $2 trillion sitting on the sidelines, waiting to see what happens in an uncertain recovery. They will have to see “greater clarity” before they deploy these resources.
ON FURTHER ACTIONS BY THE FED
Bernanke says, “We do have tools” to adjust interest rates. “The printing press is an unfair characterization” of the kinds of powers the Fed has available, Bernanke says, but he doesn’t outright deny that increasing the money supply could be the only option left.
ON OCCUPY WALL STREET, PUBLIC DISCONTENT WITH THE ECONOMY
“Like everyone else, I’m dissatisfied with what the economy’s doing right now.” He says that protesters have merit in being angry over the economy and Washington.
Bernanke lists a number of his dreams: “Stronger and more consistent education for everybody,” financial literacy, fair trade…(for everyone to stop yelling at him?)
ON THE VOLCKER RULE
Bernanke says that the Fed is about to put out a proposal for a rule limiting speculative investments by banks.
ON MARKET UNCERTAINTY
Senator Dan Coats (R-IN) says that Congress has blamed the Fed for some of its own failings.
Bernanke says that the government should put together a 10-year program to clarify the government’s positions on tax and spending reform.
ON INFLATION AND INTEREST RATES
Senator Mick Mulvaney (R-SC) is lambasting Bernanke, saying that he and the Fed are encouraging the government to expand its borrowing in an unsustainable way.
Bernanke defends his interest rate policy in order to keep the economy going, reiterating that inflation expectations are low and stable despite accommodative fiscal policy. “We have all the tools we need to reverse our policies at any time,” Bernanke says, but right now “we’re much farther from full unemployment than we are from price instability.”
Former Real World-er and Senator Sean Duffy (R-WI) asks if the situation in Greece is “sounding alarm bells” for U.S. debt. Bernanke says it’s clear that debt is an important issue.
“We have no immediate plans” for QE3, Bernanke says.
Low interest rates provide “better opportunities for investment for all savers,” regardless of the fact that it hurts those saving for retirement who invest in Treasury bonds.
UPDATE III: Lightning round!! [seriously, Sen. Bob Casey (D-PA) just said that]
– Bernanke says “housing is very central to the recovery.” Bernanke agrees that it will be “almost impossible” for the economy to recover while people are losing their houses.
– “We were working on plans” on what to do if the government failed to raise the debt limit in August, Bernanke said. “If there had been default on U.S. debt, it’s possible” that we would have seen a crisis on the level of Lehman, and the Fed would have had limited power to control it.
– Bernanke points out that “physicians and hospitals don’t have to accept Medicare patients,” if Medicare cuts back its payments enough. He doesn’t suggest an alternative to the current system, however, though suggests something needs to be done.
– Here’s more on how the Fed could influence monetary policy: clarity in terms of keeping interest rates low, altering the Fed funds rate, and changing the way the Fed pays banks.
– “I don’t care. Spending cuts, tax increases; as long as it adds up,” Bernanke says, referring to how Congress could construct a “strong, credible plan” to maintain growth while making government spending sustainable. However, he goes on to emphasise that spending cuts have not been shown empirically to help an economy recover (except in a handful of specific cases), suggesting that tax policy might be where to look to cut costs.
And it’s over.