[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 113-62
THE ECONOMIC OUTLOOK
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HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MAY 22, 2013
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Kevin Brady, Texas, Chairman Amy Klobuchar, Minnesota, Vice
John Campbell, California Chair
Sean P. Duffy, Wisconsin Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan Mark R. Warner, Virginia
Erik Paulsen, Minnesota Bernard Sanders, Vermont
Richard L. Hanna, New York Christopher Murphy, Connecticut
Carolyn B. Maloney, New York Martin Heinrich, New Mexico
Loretta Sanchez, California Dan Coats, Indiana
Elijah E. Cummings, Maryland Mike Lee, Utah
John Delaney, Maryland Roger F. Wicker, Mississippi
Pat Toomey, Pennsylvania
Robert P. O'Quinn, Executive Director
Niles Godes, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Kevin Brady, Chairman, a U.S. Representative from Texas..... 1
Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota.... 3
Witnesses
Hon. Ben Bernanke, Chairman. Board of Governors of the Federal
Reserve System Washington, DC.................................. 6
Submissions for the Record
Prepared statement of Chairman Brady............................. 36
Prepared statement of Vice Chair Klobuchar....................... 37
Prepared statement of Ben Bernanke............................... 38
Question for the Record from Senator Daniel Coats................ 41
Response from Chairman Bernanke to Question for the Record from
Senator Coats.................................................. 41
THE ECONOMIC OUTLOOK
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WEDNESDAY, MAY 22, 2013
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 10:00 a.m. in Room
G-50 of the Dirksen Senate Office Building, the Honorable Kevin
Brady, Chairman, presiding.
Representatives present: Brady, Campbell, Duffy, Paulsen,
Hanna, Maloney, Sanchez, and Delaney.
Senators present: Klobuchar, Casey, Sanders, Murphy,
Heinrich, Coats, Lee, Wicker, and Toomey.
Staff present: Corey Astill, Doug Branch, Conor Carroll,
Gail Cohen, Sarah Elkins, Al Felzenberg, Connie Foster, Niles
Godes, Colleen Healy, Robert O'Quinn, and Sue Sweet.
OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S.
REPRESENTATIVE FROM TEXAS
Chairman Brady. Chairman Bernanke, welcome again to the
Joint Economic Committee. Thank you for your service as
Chairman of the Federal Reserve. You deserve great credit for
the leadership that calmed America's financial crisis in 2008.
Four-and-a-half years after that crisis, nearly four years
after the Recession has ended, the Fed is still engaging in
extraordinary monetary actions and may continue doing so well
into the future.
Today this Committee will examine how these actions have
affected jobs and middle class Americans, and how and when the
Fed will exit its current accommodative policies.
America's economy is improving, but faces significant
challenges. We are experiencing the worst economic recovery
since World War II. The growth gap between this recovery and an
average post-War recovery is large and growing.
We are missing 4.1 million private sector jobs, and $1.2
trillion dollars from real GDP. More troubling is that many
economists are predicting a new normal for America where long-
term growth is diminished.
The Congressional Budget Office recently reduced its
estimate for future growth in real potential GDP from 3.2
percent to 2.2 percent. Now a 1 percentage point difference may
not sound like much, but it is huge.
A one percent growth gap means a $30 trillion smaller
economy in 2062 in today's constant dollars. The unemployment
rate has declined, which is very encouraging, but there are red
flags that we should not ignore.
Twenty million Americans cannot find a full-time job.
Millions more, from recent college graduates to workers in
their prime earning years, have simply given up looking for
work. Long-term unemployment remains historically high, and the
labor force participation rate is at a 35-year low.
While it is encouraging that since the Recession hit bottom
over 6 million Americans have found work, more than that--over
8 million Americans--have been forced onto Food Stamps.
Regrettably, one in six Americans must now rely on Food Stamps
to feed their hungry families.
With strong earnings' reports and the Fed's accommodative
monetary policy, there is no question that Wall Street is
roaring. But Main Street continues to struggle.
Since the Recession ended, in real terms the S&P 500 Total
Return Index has risen by 74.2 percent, while disposable income
per person has only advanced a mere 2.3 percent.
That means that over the last four years the real
disposable income for Joe Sixpack increased a mere $745. In an
average recovery since 1960, he would have $3,604 more in his
pocket by now.
Extraordinarily low interest rates have clearly boosted
housing prices and housing construction, with positive economic
effects. However, these same low rates are punishing seniors,
savers, pension funds, and insurance products. Families may now
feel more secure about their house, but less secure about their
income and job prospects.
As for the Fed's unemployment rate targeting, quantitative
easing has run out of steam. Long-term interest rates are
already at a near 70-year low. Banks have $1.9 trillion in
excess reserves at the Fed, and nonfinancial corporations have
$1.5 trillion more sitting on the sidelines. More liquidity and
lower long-term rates cannot solve the problems that are
holding back job creation in America.
Business investment in new buildings, equipment, and
software which drive job creation remains the missing
ingredient in this recovery. Monetary policy, no matter how
thoughtfully applied, has its limits. It cannot fix poor
Washington budgetary and regulatory tax policies that are
deterring business investment and the jobs that come with it.
I think my key point today is that I do not question the
intention of current Fed policy to fulfill its dual mandate,
but I question the policy's effect on employment, and I worry
about its future risks.
In the near term, these extraordinary monetary actions
become an enabler of bad fiscal policy, allowing President
Obama and Congress to avoid the tough and necessary decisions
that would clear the roadblocks to a strong economy, such as
addressing America's long-term financial sustainability,
creating a pro-growth tax code, rebalancing regulation, and
addressing the harmful economic effects of the President's
Affordable Care Act.
In the long term, the Fed's extraordinary monetary actions
pose three risks to our economy.
First, the Fed may be inflating new asset price bubbles.
Secondly, large excess reserves at the Fed could become the
fuel for future inflation when economic growth accelerates,
unless the Fed acts quickly to contract its balance sheet.
Third, the Fed's expansive balance sheet creates a perverse
incentive for future financial repression, an economic term
which means channeling domestic savings to the Federal
Government to lower its interest costs.
Since 2009, the Fed has purchased the equivalent of 24
percent of all newly issued Treasuries. When growth picks up--
and we hope it does--the Fed cannot raise its target rate for
Federal Funds and sell long-term Treasuries without recognizing
substantial losses on its balance sheet, creating uncertainty.
To avoid that, the Fed will likely boost the interest rate
paid to banks on their reserves and increase reserve
requirements, which restrict economic growth by limiting bank
loans to small businesses and families.
The net effect is financial repression, redirecting credit
from the private sector through the Fed to the Treasury to help
contain federal interest costs.
Given these risks and the limits to monetary policy in the
current economic recovery, the Federal Reserve should begin now
to carefully exit from its extraordinary monetary actions and
return to a more predictable, rules-based monetary policy that
focuses on maintaining the purchasing power of the U.S. dollar
over time.
Begin now, with clear communication to the market that will
lessen uncertainty and form the best long-term foundation for
maximum economic growth for America. Today we intend to explore
the Fed's exit strategy and timing in detail.
Chairman Bernanke, I look forward to your testimony and I
yield to the Vice Chairman of the Committee, Senator Klobuchar.
[The prepared statement of Chairman Brady appears in the
Submissions for the Record on page 36.]
OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S.
SENATOR FROM MINNESOTA
Vice Chair Klobuchar. Well thank you very much, Chairman
Brady. Thank you for putting together this hearing. As you can
see, we have very good attendance for you, Chairman Bernanke.
And thank you for being here. I look forward to your testimony
on the state of the economy and your thoughts on the short-term
and long-run issues facing our economy.
As you know, the economy has added private sector jobs for
38 straight months. During that time, 6.8 million private
sector jobs have been created. Key economic indicators are also
showing some strength. The housing market is recovering.
I had the realtors in my office from Minnesota last week,
and it was the first time they had smiles on their faces in a
couple of years.
Credit conditions are improving, but we all know--as
Chairman Brady has pointed out, that there is a lot more work
to do. My hope is that this hearing will allow us to talk about
potential solutions that can move our country forward. And
because of the Fed's two objectives for the Nation's monetary
policy--maximum employment, and stable prices--I am eager to
hear your thoughts on what the Fed is doing to stimulate
lending and economic activity.
One issue that I know we are all concerned about is what's
going on in Congress, and you have testified before about how
that would be the best solution, and that we would have more
tools to move this economy forward.
I was pleased the immigration reform bill passed with a
strong bipartisan vote last night. I think that is just one
example, as we look at skilled workers, in addition to our own
training we need to do in this country for science,
engineering, math, and technology, in addition to the work we
have to do on exports which are improving; the work on
comprehensive tax reform; as well as bringing down the debt and
getting our fiscal house in order.
And I wanted to focus on that for a minute. In the past two
years, Congress has made some progress, as you know, in
reducing the deficit. We have achieved about $2.4 trillion in
deficit reduction. And the goal of $4 trillion, which was one
goal that was set out by a number of economists, is within our
grasp over the next 10 years.
Last week the Congressional Budget Office reported that the
deficit will fall to $642 billion this year, which is $200
billion less than what the CBO projected just three months ago.
The better numbers reflect good news in housing and larger-
than-expected increases in tax revenues. But I believe that
resting on these numbers would be a mistake.
I think we are closer to reaching a new deficit agreement
that many people believe, when you look at the numbers at the
end of the year when Speaker Boehner and the President were
negotiating, when you look at some of the work that is being
done on a bipartisan basis in the Senate--and it is as
frustrating to me as anyone that we are not reigniting those
negotiations. It is only going to happen, I believe, if we work
in a bipartisan manner to get a deal done.
I believe that the budget the Senate passed, which I voted
for, is a good approach. But I think everyone is open to some
compromise. The Senate approach, I would note, is balanced with
targeted spending cuts to replace sequestration, and new
revenues from closing loopholes and ending wasteful spending in
the Tax Code, which would stabilize our debt-to-GDP ratio at
around 70 percent.
I feel strongly that we should be doing that--we should be
going to conference committee in regular order with these two
budgets, the Senate's and the House's, and get this done.
I note that last night Senator McCain and Senator Collins
also came out and agreed that these two budgets should go to
conference committee.
You have warned, Chairman Bernanke, that cutting too much
too soon could lead to a sharp contraction on our economy. I
remember that well because for any woman that's been in labor
it's a very meaningful phrase, ``the sharp contraction,'' but
it is one of the reasons I believe that deficit reduction must
be paired with economic growth.
Our ultimate goal is not simply a balanced budget; it is a
budget that has balance. As we work towards that goal, we must
avoid a repeat of the debt ceiling debacle from the summer of
2011 that rattled financial markets, led to a downgrade of the
U.S. credit rating, and unnecessarily harmed our economy.
When I asked you about the debt ceiling showdown at a JEC
hearing in the fall of 2011, you answered bluntly that it's no
way to run a railroad. I agree. We must do better this time.
We have some breathing room now, because of the change,
with the debt but we must continue to press policies that will
truly help the economy: the immigration reform I mentioned; a
long-term farm bill which helps a significant sector of our
economy that I believe will get through the Senate in the next
two or three weeks; work-skills training, as I mentioned, for
our own students; regulatory reforms; streamlining regulations.
Congressman Paulsen and I have worked a lot on the medical
device industry trying to make those FDA approvals go quicker.
Comprehensive tax reform.
Part of this of course is also smart Federal Reserve
policies. Since the financial crisis began in 2007, the Fed has
used many tools to bolster our economy. It has kept short-term
interest rates near zero since late 2008, and it has taken
action to keep longer term interest rates and mortgage interest
rates low.
As you and I have discussed, this makes it hard on savers.
Yet, in the past three years Americans have saved more than 4
percent of their income. The Fed has also taken steps to open
up its policymaking process, expand communication, provide more
specific guidance, and enhance the transparency of monetary
policy.
Finally, there has to be an ongoing discussion about
changing the Fed's goal to focus--there has been an ongoing
discussion, and Chairman Brady had a good hearing on this,
about changing the Fed's goals to focus solely on price
stability.
In my view, now is not the time for the Fed to take its eye
off promoting employment. My hope is that Democrats and
Republicans can come together to find solutions and put more
Americans back to work.
The unemployment rate, while heading in the right
direction, remains at 7.5 percent, well above the 6.5 percent
level the Fed committed to reaching before changing course on
interest rates.
As you may know, the unemployment rate in my State is
significantly lower at 5.4 percent. So, again, there are states
that have weathered this downturn and are actually expanding
the economy.
At the same time, as we know inflation is well below the
Fed target of 2 percent. It is at about 1 percent over the past
12 months. Again, we would like to hear your views on how this
will all work going out if we see improvements in our economy.
I believe that we have turned the corner and our economy is
getting stronger, but I also believe there is so much more work
to do. As Congressman Delaney knows from the hearing that we
had on long-term unemployment, while the unemployment numbers
are getting better there are still many, many people, too many
people that have been unemployed for more than six months and
are finding it very difficult to get back into the job market.
While this is all somewhat conflicting news in terms of the
long-term unemployed and the numbers would show improvement, we
all know we have more work to do. I look forward to discussing
how we can build on this economic progress.
Thank you for being here and for your testimony this
morning.
Chairman Brady. I would like to welcome Chairman Bernanke
to our hearing today. Dr. Bernanke is currently in his second
term as Chairman of the Board of Governors of the Federal
Reserve, and also serves as Chairman of the Federal Open Market
Committee.
Prior to his current position, Dr. Bernanke was Chairman of
the President's Council of Economic Advisers, and previously
served the Federal Reserve System as a member of the Board of
Governors, a Visiting Scholar and member of the Academic
Advisory Panel. He has a distinguished teaching and educational
career.
I welcome Chairman Bernanke and look forward to your
testimony. You are recognized, sir.
[The prepared statement of Vice Chair Klobuchar appears in
the Submissions for the Record on page 37.]
STATEMENT OF HON. BEN BERNANKE, CHAIRMAN OF THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC
Chairman Bernanke. Thank you. Chairman Brady, Vice Chair
Klobuchar, and other members of the Committee, I appreciate
this opportunity to discuss the economic outlook and economic
policy.
Economic growth has continued at a moderate pace so far
this year. Real GDP is estimated to have risen at an annual
rate of 2\1/2\ percent in the first quarter after increasing
1\3/4\ percent during 2012.
Economic growth in the first quarter was supported by
continuing expansion in demand by U.S. households and
businesses, which more than offset the drag from declines in
government spending, especially defense spending.
Conditions in the job market have shown some improvement
recently. The unemployment rate at 7.5 percent in April has
declined more than \1/2\ percentage point since last summer.
Moreover, gains in total nonfarm payroll employment have
averaged more than 200,000 jobs per month over the past 6
months, compared with average monthly gains of less than
140,000 during the prior 6 months. In all, payroll employment
has now expanded by about 6 million jobs since its low point,
and the unemployment rate has fallen 2\1/2\ percentage points
since its peak.
Despite this improvement, the job market remains weak
overall:
The unemployment rate is still well above its longer run
normal level, rates of long-term unemployment are historically
high, and the labor force participation rate has continued to
move down.
Moreover, nearly 8 million people are working part time
even though they would prefer full-time work. High rates of
unemployment and underemployment are extraordinarily costly.
Not only do they impose hardships on the affected individuals
and their families, they also damage the productive potential
of the economy as a whole by eroding workers' skills and--
particularly relevant during this commencement season--by
preventing many young people from gaining workplace skills and
experience in the first place.
The loss of output and earnings associated with high
unemployment also reduces government revenues and increases
spending on income-support programs, thereby leading to larger
budget deficits and higher levels of public debt than would
otherwise occur.
Consumer price inflation has been low. The price index for
personal consumption expenditure rose only 1 percent over the
12 months ending in March, down from about 2\1/4\ percent
during the previous 12 months.
This slow rate of inflation partly reflects declines in
consumer energy prices, but price inflation for other consumer
goods and services has also been subdued.
Nevertheless, measures of longer term inflation
expectations have remained stable and continue to run in the
narrow ranges seen over the past several years. Over the next
few years, inflation appears likely to run at or below the 2
percent rate that the Federal Open Market Committee judges to
be most consistent with the Federal Reserve's statutory mandate
to foster maximum employment and stable prices.
Over the nearly four years since the recovery began, the
economy has been held back by a number of headwinds. Some of
these headwinds have begun to dissipate recently, in part
because of the Federal Reserve's highly accommodative monetary
policy.
Notably, the housing market has strengthened over the past
year, supported by low mortgage rates and improved sentiment on
the part of potential buyers.
Increased housing activity is fostering job creation in
construction and related industries, such as real estate
brokerage and home furnishings, while higher home prices are
bolstering household finances which helps support the growth of
private consumption.
Severe fiscal and financial strains in Europe, by weighing
on U.S. exports and financial markets, have also restrained
U.S. economic growth over the past couple of years.
However, since last summer, financial conditions in the
Euro area have improved somewhat, which should help mitigate
the economic slowdown there while also reducing the headwinds
faced by the U.S. economy.
Also, credit conditions in the United States have eased for
some types of loans as bank capital and asset quality have
strengthened.
Fiscal policy at all levels of government has been and
continues to be an important determinant of the pace of
economic growth. Federal fiscal policy--taking into account
both discretionary actions and so-called automatic
stabilizers--was, on net, quite expansionary during the
Recession and early in the recovery.
However, a substantial part of this impetus was offset by
spending cuts and tax increases by state and local governments,
most of which are subject to balanced-budget requirements, and
by subsequent fiscal tightening at the federal level.
Notably, over the past four years state and local
governments have cut civilian government employment by roughly
700,000 jobs, and total government employment has fallen by
more than 800,000 jobs over the same period. For comparison,
over the 4 years following the trough of the 2001 recession,
total government employment rose by more than 500,000 jobs.
Most recently, the strengthening economy has improved the
budgetary outlooks of most state and local governments, leading
them to reduce the pace of fiscal tightening.
At the same time, though, fiscal policy at the federal
level has become significantly more restrictive. In particular,
the expiration of the payroll tax cut, the enactment of tax
increases, the effects of the budget caps on discretionary
spending, the onset of the sequestration, and the declines in
defense spending for overseas military operations are expected
collectively to exert a substantial drag on the economy this
year.
The CBO estimates that the deficit reduction policies in
current law will slow the pace of real GDP growth by about 1\1/
2\ percentage points during 2013 relative to what it would have
been overwise.
In present circumstances, with short-term interest rates
already close to zero, monetary policy does not have the
capacity to fully offset an economic headwind of that
magnitude.
Although near-term fiscal restraint has increased, much
less has been done to address the Federal Government's longer
term fiscal imbalances. Indeed, the CBO projects that under
current policies the federal deficit and debt, as a percentage
of GDP, will begin rising again in the latter part of this
decade and move sharply upward thereafter--in large part,
reflecting the aging of our society and projected increases in
health-care costs, along with mounting debt service payments.
To promote economic growth and stability in the longer
term, it will be essential for fiscal policymakers to put the
federal budget on a sustainable long-run path. Importantly, the
objectives of effectively addressing longer term fiscal
imbalances and of minimizing the near-term fiscal headwinds
facing the economic recovery are not incompatible.
To achieve both goals simultaneously, the Congress and the
Administration could consider replacing some of the near-term
fiscal restraint now in law with policies that reduce the
federal deficit more gradually in the near term, but more
substantially in the longer run.
With unemployment well above normal levels and inflation
subdued, fostering our Congressionally mandated objectives of
maximum employment and price stability requires a highly
accommodative monetary policy.
Normally the Committee would provide policy accommodation
by reducing the target for the Federal Funds rate, thus putting
downward pressure on interest rates generally.
However, the Federal Funds rate and other short-term money
market rates have been close to zero since late 2008, so the
Committee has had to use other policy tools.
The first of these alternative tools is ``forward
guidance'' about the FOMC's likely future target for the
Federal Funds rate.
Since December, the Committee's postmeeting statement has
indicated that its current target range for the Federal Funds
rate, 0 to \1/4\ percent, will be appropriate, quote, ``at
least as long as the unemployment rate remains above 6\1/2\
percent, inflation between one and two years ahead is projected
to be no more than a half percentage point above the
Committee's 2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored.''
This guidance underscores the Committee's intention to
maintain highly accommodative monetary policy as long as needed
to support continued progress toward maximum employment and
price stability.
The second policy tool now in use is large-scale purchases
of longer-term Treasury Securities and Agency Mortgage-Backed
Securities, or MBS.
These purchases put downward pressure on longer-term
interest rates, including mortgage rates. For some months, the
FOMC has been buying longer-term Treasury Securities at a pace
of $45 billion per month, and Agency MBS at a pace of $40
billion per month.
The Committee has said that it will continue its securities
purchases until the outlook for the labor market has improved
substantially in a context of price stability.
The Committee also has stated that in determining the size,
pace, and composition of its asset purchases, it will take
appropriate account of the likely efficacy and costs of such
purchases as well as the extent of progress towards its
economic objectives.
At its most recent meeting, the Committee made clear that
it is prepared to increase or reduce the pace of its asset
purchases to ensure that the stance of monetary policy remains
appropriate as the outlook for the labor market or inflation
changes.
Accordingly, in considering whether a recalibration of the
pace of purchases is warranted, the Committee will continue to
assess the degree of progress made toward its objectives in
light of incoming information.
The Committee also reiterated--consistent with its forward
guidance regarding the Federal Funds rate--that it expects a
highly accommodative stance of monetary policy to remain
appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens.
In the current economic environment, monetary policy is
providing significant benefits. Low real interest rates have
helped support spending on durable goods such as automobiles,
and also contributed significantly to the recovery in housing
sales, construction, and prices.
Higher prices of houses and other assets in turn have
increased household wealth and consumer confidence, spurring
consumer spending and contributing to gains in production and
employment.
Importantly, accommodative monetary policy has also helped
to offset incipient deflationary pressures and kept inflation
from falling even further below the Committee's 2 percent
longer-run objective.
That said, the Committee is aware that a long period of low
interest rates has costs and risks. For example, even as low
interest rates have helped create jobs and supported the prices
of homes and other assets, savers who rely on interest income
from savings accounts or government bonds are receiving very
low returns.
Another cost--one that we take very seriously--is the
possibility that very low interest rates if maintained for too
long could undermine financial stability. For example,
investors or portfolio managers, dissatisfied with low returns,
may ``reach for yield'' by taking on more credit risk, duration
risk, or leverage.
The Federal Reserve is working to address financial
stability concerns to increased monitoring, a more systemic
approach to supervising financial firms, and the ongoing
implementation of reforms to make the financial system more
resilient.
Recognizing the drawbacks of persistently low rates, the
FOMC actively seeks economic conditions consistent with
sustainably higher interest rates. Unfortunately, withdrawing
policy accommodation at this juncture would be highly unlikely
to produce such conditions.
A premature tightening of monetary policy could lead
interest rates to rise temporarily but would also carry a
substantial risk of slowing or ending the economic recovery and
causing inflation to fall further.
Such outcomes tend to be associated with extended periods
of lower, not higher, interest rates as well as poor returns on
other assets. Moreover, renewed economic weakness would pose
its own risks to financial stability.
Because only a healthy economy can deliver sustainably high
real rates of return to savers and investors, the best way to
achieve higher returns in the medium term and beyond is for the
Federal Reserve--consistent with its Congressional mandate--to
provide policy accommodation as needed to foster maximum
employment and price stability. Of course we will do so with
due regard for the efficacy and costs of our policy actions and
in a way that is responsive to the evolution of the economic
outlook.
Thank you, Mr. Chairman.
[The prepared statement of Chairman Ben Bernanke appears in
the Submissions for the Record on page 38.]
Chairman Brady. Thank you, Mr. Chairman.
If the economy were to accelerate, the Fed would have to
start unwinding QE-3. So what is the Fed's exit strategy, the
steps it will undertake? And when do you anticipate to begin
executing this?
Chairman Bernanke. Mr. Chairman, so the first thing of
course would be to wind down eventually the quantitative easing
program, the asset purchases.
As I've said, the program relates the flow of asset
purchases to the economic outlook. As the economic outlook, and
particularly the outlook for the labor market, improves in a
real and sustainable way the Committee will gradually reduce
the flow of purchases.
I want to be very clear that a step to reduce the flow of
purchases would not be an automatic mechanistic process of
ending the program. Rather, any change in the flow of purchases
would depend on the incoming data and our assessment of how the
labor market and inflation are evolving.
So at some point of course we will end the asset purchase
program. Subsequent to that, we will follow the guidance that
we have provided about interest rates. Our principal tool for
raising interest rates will be the interest rate on excess
reserves that we pay, which will induce higher money market
rates and a higher Federal Funds rate.
And we will complement that with other tools, including
tools that we have for draining reserves. We may or may not
sell assets. At this point, it does not appear that it is
necessary for us to sell any assets, and particularly not any
mortgage-backed securities, in order to exit in a way that does
not endanger price stability.
So there are a number of steps. We are currently discussing
further our exit strategy, and we hope to provide more
information going forward. But we certainly are confident that
we can exit over time in a way that will be consistent with our
policy objectives.
Chairman Brady. Do you anticipate allowing maturing
securities to roll off the balance sheet before you begin
selling the securities themselves?
Chairman Bernanke. As I said, we could normalize policy by
simply letting securities roll off. And I think there are some
advantages to doing that. For one, it would not disrupt markets
so much. It would avoid irregularity in our fiscal payments to
the Treasury. But we will see.
Ultimately, in the very long run, I think there is a desire
to get back to a predominantly Treasury Security portfolio. But
again, in the exit process allowing assets to roll off would be
sufficient to bring us to a more normal balance sheet within a
reasonable period.
Chairman Brady. When do you expect this strategy to begin?
What are the benchmarks you are looking at to begin this
process?
Chairman Bernanke. We are trying to make an assessment of
whether or not we have seen real and sustainable progress in
the labor market outlook. And this is a judgment that the
Committee will have to make.
If we see continued improvement and we have confidence that
that is going to be sustained, then we could in the next few
meetings, take a step down in our pace of purchases.
Again, if we do that, it would not mean that we are
automatically aiming towards a complete wind down. Rather, we
would be looking beyond that to seeing how the economy evolves,
and we could either raise or lower our pace of purchases going
forward.
Again, that is dependent on the data. If the outlook for
the labor market improves and we are convinced that that is
sustainable, we will respond to that.
If the recovery were to falter, if inflation were to fall
further and we felt that the current level of monetary
accommodation was still appropriate, then we would delay that
process.
Chairman Brady. At the pace we are going, do you think it
is likely these actions will begin before Labor Day?
Chairman Bernanke. I don't know. It is going to depend on
the data. The key to this program, and in our previous
quantitative easing programs, we gave a total amount of
expected purchases. And when that total amount was done, we
stopped. And in some cases, that stopping was premature because
the economy was not yet on a fully self-sustaining trajectory.
So the difference in this program is that we are buying a
flow rate. We are buying a certain amount of assets each month.
And the amount that we purchase will depend on how the data
come in, and how the outlook for the labor market goes over
time.
Chairman Brady. How much notice will you give the market
before you start executing the strategy?
Chairman Bernanke. Well we have explained the strategy. And
again the market can see the data as well as we can. And what
we are looking for is increased confidence that the labor
market is improving, and that that improvement is sustainable.
And as we see that, we will, in steps, respond to that by
reducing the amount of accommodation in a way that is
appropriate and maintains an appropriate level of accommodation
given the economic outlook.
Chairman Brady. It is frustrating. Here we are nearly four
years after the Recession ended, and this economy is in such a
weak state, fragile state. At this point, the patient ought to
be out of the hospital, done with rehab, and playing baseball
with its kids. I feel like the economy is in the outpatient
room and the Fed continues to feed it medicine on a daily
basis, asking are you getting better?
But my worry is that the Fed does not have the prescription
for what ails our economy. A year ago, the Fed made clear that
it would not set an employment target rate because it is
generally affected by nonmonetary factors; but your unwinding
of QE is based on the employment areas that you have the least
control of.
What do we make of that?
Chairman Bernanke. Well, Mr. Chairman, first of all the
slowness of the recovery can be explained by a number of
important headwinds, including the after-effects of the
financial crisis, developments in Europe, the problems with the
housing market, and very importantly the fact that fiscal
policy for the last few years has actually been a significant
headwind to recovery rather than a supporting tailwind.
So I would submit that without monetary policy's aggressive
actions, that this recovery would be much weaker than it has
been. And indeed, if you compare our recovery to that of Europe
and other advanced industrial economies, it looks relatively
good.
With respect to employment, monetary policy as a general
rule cannot influence the long-run level of employment or
unemployment, and that is certainly correct. What we are trying
to address here is the short-run cyclical gap.
We are seeing currently the economy operating at a level
below what it is capable of operating at, and many people out
of work who normally would have work; and monetary policy can
help to put people back to work in the short run.
In the longer run, increasing the potential growth of the
economy, as you mentioned earlier, that is not really the Fed's
job. That is the private sector's job and Congress's job in
terms of things like the Tax Code, investment in
infrastructure, training, all those things that help create
more growth potential.
Chairman Brady. And I'll just thank you and conclude with
this point. I think monetary policy has limits, and QE,
quantitative easing, has run its course. I have yet to meet a
business who tells me that if those lower long-term rates were
just lower and there was more liquidity, I'd be hiring more.
That is just not happening. It really is fiscal issues,
from higher tax increases, regulation, extraordinarily I think
burdensome to them. The President's new health care law is
creating a great deal of uncertainty and impacting job hiring
today. Those I think are the main roadblocks. That is why I
think the earlier the Fed can begin communicating and
announcing that it's unwinding, I think the more onus is put on
Congress and the White House to actually address some of these
critical fiscal issues.
With that, I recognize Vice Chairman Klobuchar.
Vice Chair Klobuchar. Thank you very much, Mr. Chairman.
Thank you.
I was going to take the analogy the Chairman just made
about the hospital, and I was thinking: Well, we are out of
intensive care, thanks in part to the Fed's actions. And we are
probably out of the hospital. But one of the problems is,
because of this brinkmanship that goes on on the Hill here, we
keep having to go back to the emergency room. And I do not
think that helps. We also just are not in that kind of long-
term healthy way that we want to be. And so I want to start
with that.
Right now the Fed is working to spur the economy, as you
just discussed with the Chairman, at the same time that
Congress is implementing across-the-board spending cuts. And I
am one that believes that we have to have a mixture of cuts and
revenue.
But some policymakers are pushing for even deeper cuts than
we are seeing with sequestration. What effect do you think
sequestration--you addressed this in your opening statement--
what effect do you think it is having on economic growth? And
do you think it would be better to have a long-term budget in
place?
Chairman Bernanke. Well as I talked about in my testimony,
sequestration is only part of an overall pattern by which there
has been considerable fiscal restraint in the short term not
involving just sequestration but tax increases, and elimination
of the payroll tax cut, and numerous other things which
collectively according to the CBO are creating quite a bit of
headwind for the economy.
Now I fully realize the importance of budgetary
responsibility, but I would argue that it is not responsible to
focus all of the restraint on the very near term and do nothing
about the long term, which is where most of the problem exists.
So I do not take a view on past cuts versus budget
spending. That is really Congress' prerogative. But I do think
that we would all be better off with no loss to fiscal
sustainability or market confidence if we had somewhat less
restraint in the very near term--this year and next year say--
and more aggressive action to address these very real long-term
issues which threaten, within a decade or so, to begin to put
our fiscal budget on an unsustainable path.
Vice Chair Klobuchar. So having a more long-term approach
with a long-term budget, with spending reductions as well as
revenue changes, would be better?
Chairman Bernanke. It is a long-term problem, and I would
advocate looking at it from a long-term perspective. I worry
sometimes that the 10-year window may artificially constrain
the thinking about the appropriate horizon for budgetary
discussions.
Vice Chair Klobuchar. Well we are not even at the five-year
window. So I would note again that there are many of us here in
the Senate, including now Senator McCain and Senator Collins,
that would like to see a budget conference committee so we can
really work on these things and try to work them out.
You were talking with Chairman Brady about the Fed's work.
There have been proposals to change the Fed's dual goals of
maximum employment and price stability to a single focus on
price stability. How would that change the Fed's policymaking?
Chairman Bernanke. Well first let me say that of course
Congress sets the mandate for the Federal Reserve, and so
Congress has the right to set the mandate of course any way it
likes. My own personal view is that we have been able to help
on the employment side, and that the dual mandate has served us
well since the mid-1970s when it was first incorporated. So I
would recommend that you stay with that. But again, Congress
certainly is able to make that decision if it wishes.
I would point out that even though we have a dual mandate,
that inflation if anything is a little bit too low. Inflation
has been very low. The dollar has been strong. We have not in
any way failed on that responsibility.
So I think it is consistent with our mandate and with our
current policy to maintain price stability, and that is what we
have been achieving.
Vice Chair Klobuchar. In fact, do central banks in other
countries that just have a single goal and not the dual
mandate, do they have a better track record in terms of
inflation and other things?
Chairman Bernanke. No, I don't think so. I think in
practice they do respond to cyclical conditions, as well as to
inflation. That is certainly the case in a number of major
central banks. But again, I think our inflation record is as
good as really any major central banks. So it has not really
been a sacrifice in that respect.
Vice Chair Klobuchar. Last month we held a hearing here
examining the persistently high rates of long-term unemployment
during the Recession and the recovery. Close to 4 in 10
unemployed workers have been without a job for 6 months or
longer. You made reference to it in your testimony.
Long durations of unemployment of course have lasting
adverse impacts on earnings, health, and even the achievement
of the children of the unemployed. Are you seeing signs of
rising structural unemployment? And is the high long-term
unemployment rate a sign of structural challenges?
Chairman Bernanke. Well it is a significant concern, and we
are seeing evidence, for example, that employers are reluctant
to look at people who have been out of work for a long time,
even if they appear to be qualified, just on the assumption
that if you have not had a job for six months there must be
something wrong with you.
Vice Chair Klobuchar. Actually, the former advisor to Mitt
Romney, who spoke here, who did a very good job, talked about
that as a scar on these workers; that it is so difficult for
them to go out there with this record at this point.
Chairman Bernanke. That's right. So we think at this point
that this is not an irreversible problem. But we are concerned
about the long-run effects on employability of people who have
been out of work for a long time. And if they are employed
again, what will their wages be? Likely much lower.
Vice Chair Klobuchar. Is the Fed equally able to address
cyclical and structural unemployment? Or are structural
unemployment problems different, and are they better addressed
through job training, education, things we should be doing in
Congress?
Chairman Bernanke. Monetary policy--and this again relates
to my answer to Chairman Brady--is not able to address long-run
employment issues very well. I mean, our goal is to address
cyclical unemployment primarily.
That being said, cyclical unemployment that lasts long
enough becomes structural unemployment as people lose skills
and so on, and that is one reason for the urgency of trying to
get people back to work as quickly as possible.
Vice Chair Klobuchar. I mentioned how low interest rates
have helped spur the economy by promoting investment by
businesses and households, and low mortgage interest rates have
helped with this growing housing market for the first time in
many years, but lower interest rates as you and I discussed
have also hurt older Americans who live off fixed incomes and
are relying on the safe return they can get from the savings
they keep in government bonds.
Could you talk about the impact you think low interest
rates are having on U.S. households?
Chairman Bernanke. Well generally I think that low interest
rates are helping households. I am very aware of the return
issue you just mentioned, and I will come back to that in just
a second. But it is also true that low interest rates are
making it easier for people to buy homes, are increasing the
price of homes, are increasing construction jobs and other jobs
related to housing, have supported automobile purchases, and
manufacturing, and are generally adding both to employment and
to the wealth of Americans. And so in that respect I think that
this is very much a Main Street policy. That is certainly our
intention.
With respect to savers, savers have many hats. They are
workers. They may own a small business. A healthy economy helps
them in those capacities. And as I said in my testimony, what
we would like to do is get higher returns in a sustainable way.
A weak economy will not produce high returns. In Japan, for
example, interest rates have been 1 percent or lower for 15
years. The only way to get interest rates up is to get the
economy growing again so that returns will be adequate, not
just for fixed income instruments but for other kinds of assets
as well.
Chairman Brady. Thank you, Vice Chairman. The time is
expired. Mr. Campbell is recognized for five minutes.
Representative Campbell. Thank you, Mr. Chairman, and Mr.
Chairman.
You mentioned in your opening remarks about financial
stability concerns driven by the quest for higher yields, and
some of the risks that that could cause given the low yields in
fixed-income instruments.
Has your concern about these financial stability concerns
increased recently?
Chairman Bernanke. I would say that it has increased a bit.
We have greatly increased our monitoring and our attention to
these issues, and we pay very close attention to essentially
all asset classes and all major types of financial
institutions, even those we don't regulate. We are trying to
ascertain both whether there is a sign of frothiness or bubbles
and, moreover, what exposure there is in the sense of high
leverage or other kinds of vulnerabilities that would mean that
if a frothy asset price were to reverse, what implications
would that have for the broader economy.
So we are paying close attention to that. And we are doing
our best, both through monitoring but also through our
supervision/regulation/coordination with other agencies and so
on to address these problems. Some of these issues were
discussed in the FSOC's annual report, which Secretary Lew has
been testifying about.
So this is an issue, and it is something that we take into
account. As was mentioned in the statement, we look at the
costs and the efficacy of our program. And I think the most
significant cost is probably financial stability concerns.
On the other hand, it is a very difficult tradeoff because,
as I mentioned, a weak economy means lower interest rates,
which creates some of the same problems. And, more over, a weak
economy means worsening credit quality, for example. And that
too has financial stability implications.
So there are tradeoffs and difficult judgments to make. But
I just want to assure you that we are quite aware of this issue
and are watching it very carefully. And it does factor into our
thinking about the appropriate amount of accommodation and the
appropriate exit strategy.
Representative Campbell. Speaking of exit strategy,
yesterday Federal Reserve Bank President William Dudley said
that the Federal Reserve should consider holding on to
mortgage-backed securities until maturity rather than selling
them at whatever point an exit strategy might be necessary.
Maybe I read wrong, but I thought I heard in your responses
to Chairman Brady's questions that perhaps you agree with that
viewpoint? And if so--because when the Fed entered the QE a
couple of years ago that was not the plan for the exit
strategy. The plan for the exit strategy was to begin selling
these securities at some point.
Where are you? Where is the FOMC on this?
Chairman Bernanke. Well, you are correct that we have not
updated the exit strategy we put out two years ago, which
included sales of MBS. And as I said, we've not done that yet
and so the Committee has not officially communicated our plans
there. But I will say that we have done a lot of work on this,
and I personally believe that we could exit without selling any
MBS because most of them will run off in a reasonable period.
But that decision has not yet been taken, and we will
certainly let people know it when it is taken.
Representative Campbell. If you do that, aren't you subject
to an argument that that is outright monetization, in that that
debt will never have been sold to the public effectively? That
you are increasing the monetary base this way?
Chairman Bernanke. No, because monetization means that we
permanently finance the government using money. What we plan to
do is ultimately to get our balance sheet back down to a more
normal level, and, in particular, to get excess reserves which
are currently nearly $2 trillion back to a more normal $25
billion or so at some point. It seems like the likely outcome
there.
My point is that we can do that by allowing assets, and
particularly MBS, simply to run off and mature, rather than
selling them. Either way, it gets them off our balance sheet.
Representative Campbell. In my final 45 seconds here, Bank
of Japan yesterday reiterated their QE, if you will, and there
is significant buying. The yen has been depreciating about 5
percent against the dollar. How do you see this in terms of the
potential currency war, the race to the bottom, our QE, their
QE; are all world central banks leaning towards trying to--in a
war here of depreciating currencies?
Chairman Bernanke. The G-7 has given a statement with which
we agree, which is that monetary policies which are directed
primarily at the domestic economy and are not specifically
designed to affect relative exchange rates, are acceptable
because whatever effect they may have on exchange rates they
also affect domestic demand in Japan which is good for the
global economy because it creates more trade and more activity
around the world.
So we are supportive of Japan's policies, and I would make
two observations. One is that under their current plan the Bank
of Japan's balance sheet as a share of GDP will be three times
larger than the Fed's. Just to give you a sense of proportion.
And secondly, though, that the actions they have taken seem
to be having fairly dramatic effects both on financial markets
but also on--so far as we can tell--on some aspects of the real
economy. And I take that as a bit more evidence that these
policies do have effects on the economy.
Representative Campbell. Thank you.
Chairman Brady. Thank you.
Representative Delaney is recognized for five minutes.
Representative Delaney. Thank you, Chairman Brady.
And thank you, Chairman Bernanke, not only for your
leadership, which was really incomparable across the financial
crisis in particular, but also for your testimony today which I
thought was very well crafted in terms of laying out the limits
on the economic recovery we can see absent certain actions from
Congress and the Administration.
In other words, the cost of this inaction is not nothing,
and we are seeing that in the results in the economy. And it
seems to me you were fairly specific with the two things we
should do.
The first thing is we should focus on the long-term fiscal
challenge--the years, what I'll call 2011 through 2020
challenges--which can only be addressed through appropriate but
comprehensive reforms to our entitlement programs, and reforms
to our tax systems.
But then also in the short term, to be more intelligent
about the cuts that we make, about our tax policy, and about
the investments we make as a country.
And then, absent our doing that, you face challenges, and
the country faces challenges. Your challenges are you have to
continue to use monetary policy to make a difference against
unemployment.
And so, while I agree with Chairman Brady that monetary
policy has limits, it seems to me its limits have to always be
defined in the context of what else is going on and what other
actions are taken.
In other words, the limits I would think of your monetary
policy would be different if Congress was acting in a different
way. And so my question really ties into what Senator Klobuchar
was talking about with employment.
Because if we deconstruct our employment challenges between
cyclical unemployment and structural unemployment, how do you
think about the effects of monetary policy? Obviously monetary
policy can be more responsive to cyclical unemployment than it
can to structural unemployment, which requires policy
initiatives--true long-term policy initiatives it seems to me--
how do you think about the target for unemployment in light of
what you are seeing between cyclical unemployment and
structural unemployment?
Chairman Bernanke. Well, to respond to your first comment,
I think a more balanced monetary fiscal mix would be better.
Monetary policy cannot offset what is happening in the fiscal
sphere, and it would be better if there was a more equal burden
sharing between the different parts of the government in that
respect.
It is very difficult to assess exactly what the long-run
natural, or structural rate of unemployment is. As I said
before, for the most part the Federal Reserve cannot influence
the long-run structural rate of unemployment except insofar as
cyclical unemployment becomes structural unemployment. So we
are focused primarily on our estimates of cyclical
unemployment, and, in particular, our forward guidance gives a
way station of 6.5 percent which is a point at which we will
consider beginning the tightening process. That does not mean
we think that is the lowest rate that can be achieved, but we
have to begin a process before we get to that lowest rate or
else we will risk overheating the economy.
We have a protection, which is a second condition, which is
that if we see inflation beginning to rise, which would suggest
that structural unemployment is higher than we estimate, then
we would perhaps raise rates earlier. So that is how we protect
ourselves.
Representative Delaney. And then as we think about the
unwinding question, and if we look at some of the external
factors that we are observing--rates obviously low, as we all
know; markets quite strong without any observation that there's
a bubble because price-to-earnings ratio, et cetera, are at
historical averages; corporate balance sheets in very good
shape; consumer balance sheets in much better shape than
they've been for a long time; opportunity to have low-cost
energy over the long term--if we were to actually do something
significant in terms of the fiscal condition of the country, in
your opinion how much would that improve the fundamentals
around employment that would allow you to have more flexibility
in your ability to unwind?
So if a grand bargain were to happen, how much greater
flexibility do you think that provides you?
Chairman Bernanke. Well, you addressed in that last comment
the point I wanted to make. Which is, I view this as a two-
handed thing, a two-part policy. Which is, on the one hand
slowing the pace of tightening in the very near term, but at
the same time doing things that will create greater confidence
about fiscal sustainability in the long run.
I think that combination would be confidence-inspiring in
the public and markets. It would help strengthen the economy
certainly. And it would take some of the burden off of monetary
policy. And I agree with Chairman Brady that monetary policy is
not omnipotent. We are pushing pretty hard at this point, and
there are a lot of headwinds. And it would make it certainly
easier for us to unwind.
Representative Delaney. Great. Thank you, Mr. Chairman.
Chairman Brady. Representative Hanna is recognized for five
minutes.
Representative Hanna. Thank you, Chairman.
Chairman Bernanke, all jobs are not equal. In fact, in the
last 20 or so years about 98 percent of the jobs that have been
created have been service-oriented jobs, not STEM--science,
technology, engineering, and math.
We have a skills gap. We have a growth gap. We have what
seems to be an intractable employment gap, a shrinking middle
class, and on top of all of that a lack of real growth in real
income.
In a speech you gave the other day at BARD--and I don't
attribute this to you, you are attributing it to someone else--
you said: The IT revolution, as important as it surely is,
likely will not generate transformative economic effects that
flow from the earlier technological revolutions. As a result,
these observers argue, economic growth and change in coming
decades will likely not be noticeably slower than the pace to
which Americans have become accustomed.
Apparently Dr. Kevin Hassett agrees with you, or agrees
with that statement of the American Enterprise Institute.
Though the structural factors such as mismatch between skill
sets, arguably STEM, that the employed have in the skills that
employers need also plays a significant role, which leads us
back to education.
My question is in three parts. How much of today's
unemployment is cyclical, and how much is structural?
If a significant portion of today's unemployment is
structural, then how does a highly accommodative monetary
policy that the Fed is pursuing boost employment, cyclically or
structurally over the long term?
And if a significant portion of today's unemployment is
structural, do we expose ourselves to significant risk of price
inflation in the near term by continuing a highly accommodative
monetary policy until the employment rate drops below 6\1/2\
percent?
Chairman Bernanke. So on the first question, how much is
structural, again nobody knows precisely. It has to be
estimated. The FOMC makes its own estimates, and the numbers we
have come up with are between 5.2 and 6 percent.
So if we have 7\1/2\ percent unemployment now, we are
saying there's still probably a couple of percentage points of
cyclical unemployment which can be addressed by monetary
policy. The rest probably cannot be addressed by monetary
policy, except to the extent that cyclical unemployment left
untreated will become structural unemployment.
In terms of longer run growth, the comments that you read
were pessimistic comments about the IT revolution. Let me be
clear that I laid out this view that, as you mentioned, of
pessimism, and I was agnostic about that. I think that there
are a lot of differences between the world today and the world
in the 19th Century when other inventions were being made.
And what is important about the difference, the most
important differences have to do with the amount of research
and development funding, the skills available, the markets that
make it very profitable to be first to market with a new
innovation. And since research, development, and technological
progress are the engines of long-term growth, I think that as a
country we need to think about our policies in that area and
try to do what we can to address shortages of STEM workers,
mismatches, assure that talented people from all over the world
can come to the United States and participate in technical
innovation.
So I think this is a very important area, and I am the
first to admit that it is outside the realm of what the Fed can
do. It is really something that only Congress can address.
Representative Hanna. Thank you very much. I yield back.
Chairman Brady. Thank you.
Senator Sanders is recognized.
Senator Sanders. Thank you, Mr. Chairman.
And, Mr. Chairman, thanks for being with us. There are
three or four issues that I have been working on that I would
appreciate your commenting on.
Number one, I continue to worry about the growing
inequality of wealth and income in this country. We have the
absurd situation where the top 1 percent now owns 38 percent of
the wealth in America. The bottom 60 percent own 2.3 percent.
And in the last recent years, almost all new income went to the
top 1 percent.
Now as part of that, I also worry about concentration of
ownership, particularly with what is going on in Wall Street.
We bailed out the large financial institutions because they
were too big to fail, and yet all 10 of them today are larger
than they were when we bailed them out.
There is a growing feeling among many economists, including
the president of the Dallas Fed, that maybe the time is now to
start breaking up these large financial institutions, the top
six of which have assets equivalent to two-thirds of the GDP of
the United States of America.
So I would like you in a second to comment: Is now the time
to break up large financial institutions which have an
unbelievable amount of assets and are, in my view, in danger at
some point in the future of once again being in a position of
having to be bailed out?
Issue number two deals with the structure of the Fed, laws
that the Fed did not make but Congress made. As you know, we
have 12 regional Feds, Reserve Banks, which have 9 members
each. Many of my colleagues may not even know this, but as a
result of Congressional law: of the 9 members, 3 come from the
financial institutions themselves, 3 others are appointed by
the financial institutions, and 3 come from appointments by the
Fed.
We have had absurd situations where Jamie Dimon, the CEO of
the largest financial institution in America, sat on the New
York Fed whose job is supposedly to regulate Wall Street, and
many of us think that is the fox guarding the henhouse.
I will be introducing--reintroducing--legislation to end
what I consider to be an absurdity of having 6 out of 9 members
of Regional Feds coming from the financial institutions.
The last question that I would like to ask is the fact that
from the end of 2007 until April of 2013, financial
institutions have increased the amount of excess reserves held
at the Fed from $1.5 billion to more than $1.7 trillion. And
one of the reasons why that has occurred is that, since 2008
the Fed has provided interest to financial institutions to keep
this money at the Fed.
So what we see is huge financial institutions parking huge
amounts of money at the Fed getting a small amount of interest.
I think it would be much more productive for our economy if
that money was out going to small businesses and into the
productive economy, rather than sitting at the Fed.
And the legislation that I am working on would address this
problem by prohibiting the Fed from providing interest to banks
on their excess reserves, and require the Feds to impose a 2
percent fee on the excess reserves of the largest banks in
America, those with more than $50 billion in assets. In other
words, get the money out rather than parking it in the Fed.
So those are three issues that I am working on that I would
love to have your comments on. Thank you, very much.
Chairman Bernanke. Senator, on the last one, the amount of
excess reserves in the banking system is completely out of the
control of the banks. The Fed puts those reserves in the
system. The banks can pass them around from each other, but the
total is just given. They can't do anything about that. It's
like a hot potato.
The quarter percent interest that we're paying them, which
we're doing for technical reasons, is not preventing money from
going out to small business or any other business. After all,
CNI loans are paying about 4 percentage points now. Prime rate
is I think about 3\1/2\. So if they can find--if banks can find
attractive loans, they are certainly going to make those loans
rather than hold the excess reserves.
In addition, getting rid of the interest in excess reserves
capacity would force us, when we come time to tighten, it would
force us to sell assets very quickly in a very disruptive way
instead of using that tool to tighten interest rates and avoid
inflation. So it would be very counterproductive. And we can
discuss that I'm sure at more length.
Senator Sanders. Yes. Breaking up the large banks?
Chairman Bernanke. That is a very complex question. I think
that many of the suggestions to break them up have either
involved relatively small changes, or a form of Glass-Steagall.
I think Glass-Steagall is not the solution because, as we saw
in the crisis, investment banks, commercial banks separately
got into serious trouble.
I would support--so I think that we are doing a lot of
things, which I don't have time to go through, through Dodd-
Frank, through Boswell III, through Orderly Liquidation
Authority, and other authorities to move in the right direction
towards addressing too-big-to-fail.
And as I have said, if we do not feel after some additional
work here that we have addressed that problem, I would
certainly be supportive of additional steps. I think the best
direction is probably requiring the largest firms to hold more
capital proportionally, and that would force them both to be
safer, to have a more level playing field, and if their
economic returns did not justify the higher capital costs to
induce them to break themselves up.
Senator Sanders. Structure of the Fed, the Regional Fed.
Chairman Bernanke. Structure of the Fed, I am very open to
discussing those with you. I just want to assure you as
strongly as I can that the primary role of the board members
is, first, to give us market insight, business insight, let us
know what is going on in the economy.
They are also helpful on some operational issues. But there
is a complete and utterly impermeable wall between the board
members and any supervisory matter. And I assure you of that.
And so there really is no conflict.
That being said, I can see why you might want to have
different people represented on that board--more union members,
for example, and I think that is a perfectly reasonable thing
to talk about.
Chairman Brady. Thank you. All time has expired.
Representative Paulsen.
Representative Paulsen. Thank you, Mr. Chairman.
Chairman Bernanke, I wonder if you can just comment on what
are the primary factors that you are monitoring to gauge the
economic risks of your current policies? In other words, given
that the effectiveness of Federal Reserve policy has been at
least somewhat muted over the last few years by a strong
deleveraging cycle, how important do you consider the expansion
of bank lending, or the results of the Fed's own senior loan
officer opinion survey as a gauge of future inflation?
And also what other factors, other than just pure inflation
measures, do you look at as potential precursors to an
expansion of economic risks due to these policies?
Chairman Bernanke. Well we have seen a number of things
which are suggestive that the effects of the financial crisis
are being mitigated to some extent.
As you mentioned, consumers are deleveraging. Their debt
burdens and their interest burdens are going down, and their
balance sheets are healthier than they have been. A smaller
number of people are underwater on their mortgages, for
example.
Banks are much healthier. In our regulatory role, we have
been doing these stress tests and we found that the largest
banks have now roughly doubled the amount of capital that they
had four years ago. And as that survey you mentioned indicates,
their willingness to lend is improving in many areas, not in
all. There are still issues in mortgage lending. But credit
availability is improving.
So a number of factors related to the financial crisis do
seem to be moderating, and that is hopeful for further progress
in the real economy.
On inflation, you know, we use econometric models. We look
at market data. We look at commodity prices, commodity futures
prices. We simply don't see at this point much sign of
inflation. In fact, inflation is a little bit on the low side
historically.
And if you look at market indicators, the very fact that
the United States can borrow at 30 years at under 3 percent is
indicative of the idea that investors are not anticipating a
major inflation problem in this country.
So we are very attentive to that. That is half our mandate.
But at the moment inflation, if anything, seems a little bit on
the low side.
Representative Paulsen. And knowing that's the case, why do
you think businesses are not investing so much in the economy?
Interest rates are at really low rates, especially long-term
interest rates. And so I don't talk to any businesses, again in
Minnesota, that are saying interest rates need to be lower for
us to invest. But at what point--you know, can you comment,
like whether it's the tax increases. You talked about the
payroll tax in your testimony expiring. You talked about the
tax increases maybe at the end of the year having an effect.
But at what point are the tax hikes, do you believe, on
high-end earners or as a part of the new taxes associated with
the implementation of the Affordable Care Act, and in Minnesota
Senator Klobuchar and I, we both see the effects of the Medical
Device Tax, at what point do you think those taxes are having
an impact now in terms of a drag on the economy?
Chairman Bernanke. Well firms had been investing in hiring.
In a way, that is consistent with the overall slow pace of
growth. I mean, they are not seeing the rapid growth that would
induce them to expand capacity quickly.
Given the amount of growth that they see, they have been
investing, and employment growth, as unsatisfactory as it is,
is probably a little stronger than you would have guessed given
how much GDP growth there is, how much output growth there is.
Firms do not respond very strongly to interest rates
directly in their investment decisions. A lot of literature
suggests that. But they do respond to final demand. How many
orders they have. And so indirectly the way monetary policy
stimulates capital investment is by generating more consumer
demand through the fact that lower interest rates do affect
consumer spending, or raise house prices, or other asset
prices. And we have been seeing the last few reports on
consumer spending have been surprisingly strong, and we have
seen improvement.
Just the other day we saw a very substantial improvement in
consumer optimism. So that is where the monetary policy's best
channel for affecting investment. If firms see more demand
coming in the door, then they will expand capital and labor.
Representative Paulsen. And do you see a drag on the
economy with some of the tax hikes that have happened at the
end of the year?
Chairman Bernanke. I mentioned a list of things, including
tax increases, elimination of the payroll tax cut, other
things. I am not pronouncing on the desirability of any one of
those specific policies. I am just saying, taking them all
together they have the effect of being a drag on economic
growth, perhaps more than necessary.
Representative Paulsen. I yield back, Mr. Chairman.
Chairman Brady. Thank you. Senator Coats is recognized for
five minutes.
Senator Coats. Thank you, Mr. Chairman.
Chairman Bernanke, sometime earlier you and I had a
conversation and I asked you the question about why the United
States was doing relatively better than its neighbors across
the seas than others. And you said, well, it's because we have
the best-looking horse in the glue factory.
I am wondering where that horse is now. Is our horse still
in the glue factory? Is he in the pasture just outside the glue
factory? Or is he back on the farm?
Chairman Bernanke. Well it is clearly the case that we are
not yet where we want to be. We have 7\1/2\ percent
unemployment. We have a very low ratio of employment to
population, and a lot of people leaving the labor force. GDP
growth has exceeded now where we were before the crisis, but we
are still well below the trend of growth.
That being said, I was struck at the latest meetings of the
IMF and the G-20 in Washington recently when the IMF economists
were talking about a three-speed global recovery, by which they
meant the fastest growth still taking place in some of the
emerging markets like China, but the United States now breaking
away to some extent from the pack--notably from Europe and
Japan--and we have had better performance.
In the case of Europe, it was about less than four years
ago that the U.S. and the Euro area had the same unemployment
rate. Today, our unemployment rate is 7\1/2\ and the European
unemployment rate is above 12. So we really have done better
than some other countries, for a variety of reasons, not just
monetary policy or any single factor.
But we are moving in the right direction but, you know, I
don't think we can be yet satisfied given where the labor
market is, and given that we still have unused capacity in this
economy.
Senator Coats. You cautioned in your statement that too
much restraint too quickly continues to be the headwind that we
may not want to get into, but we have not addressed our longer
term problems.
Then you mentioned that you thought the 10-year window
might be too short to do that. Some of us are looking now at
something like more than 30 years, relative to where our growth
will be relative to our debt. And particularly the enormous
spike in mandated mandatory spending and the impact of that on
interest rates and the economy and so forth.
You suggested before that you have used a lot of the tools,
most of the tools that the Fed has to get us through this
period of time, but ultimately that responsibility falls here
and with the Administration. And we have yet to I think summon
the political will to address that long-term problem.
My take is that that begins in earnest in a relatively
short period of time, maybe two or three or four years. And so
to me it would make sense that we begin to address it now.
Chairman Klobuchar Vice Chair mentioned some of that
earlier. Could you expand a little bit more on that about what
you think our responsibility is? Because I am starting to hear
things like the Fed is buying us time, so therefore we do not
need to take action right now.
Is the Fed being an enabler for an addiction that Congress
cannot overcome?
Chairman Bernanke. Well the Fed is doing what Congress told
it to do, which is we are doing our best to try and promote
maximum employment and price stability.
Congress needs to take a longer view. It is true that
interest rates are quite low today, and therefore the interest
burden today is quite low. But when the CBO scores budget plans
out for a decade or two decades, it assumes that interest rates
are going to rise, which we hope they will because that will be
a suggestion that the economy is recovering and coming back to
normal.
So in looking at those 5, and 10, and 20 year budget plans,
they assume higher interest rates. And you are going to have to
deal with higher interest rates at some point, we hope, as the
economy strengthens. And so I very much support your suggestion
of having a longer horizon.
I would note the 1983, or whatever it was, Social Security
Commission that my predecessor chaired, that the reforms that
were introduced then are still now being phased in. So 30 years
later. So for some of these changes with very long lead times,
they will make them much easier to achieve.
Senator Coats. And lastly, your concern about the low
amount of interest return and the risk taking, or the reaching
for yield, is this creating another potential bubble? There is
a big surge in the market here that seems to be not in force by
underlying fundamentals, but I would like your take on that.
Chairman Bernanke. Well we are watching it carefully, and
of course nobody can ever say with certainty what an asset
price should be. But to this point, our sense is that major
asset prices like stock prices and corporate bond prices are
not inconsistent with the fundamentals.
For example, it was mentioned earlier that price/earnings
ratios and the like are fairly normal in the stock market.
In addition, in thinking about risk to financial stability,
you also have to look at things like leverage, credit growth,
and other indicators that suggest not only is there some
mispricing going on, but that mispricing has the possibility of
greatly damaging the broader financial system. And we are not
seeing that at this point.
So at this point, of course it is always again dangerous to
predict, but our sense is that those issues are still
relatively modest. But they require very close attention, and
we will continue to do that.
Senator Coats. We are glad you are doing that because we do
not want a repeat of what happened before.
Chairman Bernanke. Absolutely not.
Senator Coats. Thank you, Mr. Chairman.
Chairman Brady. Thank you. Representative Sanchez is
recognized for five minutes.
Representative Sanchez. Thank you, Mr. Chairman.
And, Mr. Chairman, thanks again for being before us. I
think we have had many years when you were the President's
economic advisor, and now as Chairman.
So I know that now you are sitting as the Chairman, but I
have questions overall about our economy and I would really
like to get your idea on something in particular.
I remember when Chairman Greenspan was before us, and I
talked to him about--I spoke to what I saw at the time, a
frenzy in the housing market, and right around the time he
called it just a ``frothing'' in a particular set of markets.
And of course since having left said, ``I completely missed
what was going on.''
So I want to go back to housing, because I think housing is
such an incredible piece of the American's budget, the American
family's budget, their sense of wealth creation. Because in
many ways it is the first step, and it is traditionally what we
have used to make small businesses, or to put kids through
college, et cetera.
So this is what I see going on now. Around the Nation in a
lot of markets, in particular in California, housing prices are
going up. So everybody is cheering and everything. But what I
see is foreign money coming in. Money is being bought as
investments. Banks sloughing off large amounts of homes and
putting them into hedge funds. These funds are holding on to
these and renting them out, anticipating at some point I'm
sure, 5 or 10 years down the road, to get appreciation out of
those assets.
Rental markets are tightening. Rents are going through the
roof. And your average working family, at least where I live,
is not able to buy a home because of these, if you will,
``haves'' who have the money and the cash to come in and buy
the home, and in return not flip it as we saw in the last
speculation housing market, but actually hold it at a higher
rate for rent to these families who now are becoming, unless we
change something, permanent renters.
So the housing market is getting better, but not for the
middle class or the higher lower income class. And it's almost
chaining them, I would say, into the inability to find their
way to home ownership.
So do you see that going on? Do your people see that going
on in the different markets? And secondly, what can the
Congress do to ensure not the other way where we went wrong
that too many people who should not have been buying in bought
in, but that what we would normally call the middle class, and
people who should be attempting to buy a home, not get caught
in this cycle of ``I didn't get in and I didn't get a home''?
Chairman Bernanke. Well just a few comments.
First, with prices having fallen about 30 percent and with
very, very low mortgage interest rates, affordability right now
is the highest it has been in decades. So there are people who
are able to buy now who could not have bought under other
circumstances--although mortgage lending, I agree, is tight for
the people in the lower part of the cycle distribution. I agree
with that.
On the rent side, many people who have lost homes or
otherwise not become home owners, stopped being homeowners,
have gone to renting. And rents have gone up, as you said. So
it is probably a good market response that houses that were
previously owned are now being available for rent. That is
adding supply to the rental market and will probably take some
pressure off of rents and reduce the rents that people have to
pay who are forced to rent.
Representative Sanchez. Well excuse me a minute, Mr.
Chairman. Those people who had mortgage rates who were paying
mortgages and, you know, we know that a good amount of these
people lost their job, and that is why they were not able to
continue their payments. But in most cases, what I see in my
markets are lower mortgage payments that they were making,
versus higher rental payments that are now being caused again
because the family is not getting credit, or the family cannot
get credit, or even those who qualify with credit, you know,
cash offers in particular foreign markets, are, you know,
wiping them off from being able to own them.
So what I see for a family unit is a higher cost of
housing, effectively, than what they had pre this whole
problem.
Chairman Bernanke. Well again, if you can get a mortgage--
which I understand your question--the payments are low, and
affordability is high. I agree with you--if this is your
question, I agree with you that mortgage lending is still too
tight.
There are a number of reasons for that: excessive
conservatism on the part of the banks; some uncertainty about
regulation. You know, there is still work to be done to clarify
the securitization rules, for example. The need for GSE reform,
and other things. Fear of put-backs that the banks still have.
So I think over time, particularly as house prices go up a
bit, that mortgage lending will become a little bit more
accessible to a broader range of people. But right now it is
still relatively tight. So I agree with that.
Chairman Brady. Thank you, Chairman. All time has expired.
Senator Lee.
Senator Lee. Thank you very much, Mr. Chairman.
And thank you, Chairman Bernanke. Mr. Bernanke, does
quantitative easing on the margin tend to encourage private
sector debt? Or does it at least tend at the margin to
discourage private sector deleveraging?
Chairman Bernanke. Well on the one hand with low interest
rates, we do want people to spend normally. We want them to be
able to afford a house or a car, and that is part of what puts
the economy back to work.
But on the other hand, as the economy strengthens, jobs are
created. They get more income. And interest rates are lower. So
those factors overall help people deleverage. And as you look
at the data, you will see that consumers have deleveraged quite
a bit over the past few years.
Senator Lee. Does quantitative easing facilitate or
otherwise promote the accumulation of government debt?
Chairman Bernanke. By whom?
Senator Lee. At least at the margin?
Chairman Bernanke. By private citizens?
Senator Lee. No, no. Does quantitative easing have an
impact on the accumulation of government debt? Does it at least
at the margins make it easier for government to acquire a lot
of debt?
Chairman Bernanke. To issue a lot of debt, you mean?
Senator Lee. Yes.
Chairman Bernanke. Well it does keep interest rates a bit
lower in the short term, although again what we are trying to
do is get a stronger economy which will support higher interest
rates going forward.
And as I have mentioned, any kind of budgeting process that
looks ahead even more than one year has to take into account
the CBO's estimates that interest rates will be rising over the
next few years and factor that in when you make your budgetary
calculations.
So I don't see how raising interest rates prematurely and
causing the economy to relapse back into recession would be
helpful to fiscal policy. I think it is important for Congress
to look at the 5- and 10-year window and look at how interest
rates are expected to move, and make decisions based on that.
Senator Lee. To the extent quantitative easing does have
these impacts that I've described, it does so basically by way
of encouraging consumption. Isn't that sort of the aim of it?
Chairman Bernanke. Right. There's not enough demand in the
economy, so it does encourage consumption, yes.
Senator Lee. Okay. Was net equity extraction from homes and
increased leverage a problem the last time the Fed had very low
rates for a really prolonged period of time, let's say in the
mid-2000s?
Chairman Bernanke. There was a lot of equity extraction
from homes during that period. How much was due to the Fed
policy, how much was due to lax lending policies, how much was
due to regulation, is a debated question.
Senator Lee. And did the excessive leverage, whatever its
cause, tend to exacerbate the crisis that arose in 2008?
Chairman Bernanke. Yes.
Senator Lee. Did the Fed identify the weakness in housing
in the mid-2000s and react to it?
Chairman Bernanke. Well, we saw--we saw, and this goes back
to my discussion with Representative Sanchez--we saw that the
relationship between house prices and rents was very--that
house prices were very high relative to rents. House prices
were historically very high.
And so therefore it was always considered a possibility
that house prices would come down. And in fact when I became
Chairman in 2006, house prices were already coming down. So,
yes, we certainly saw that as a possibility. What we did not
anticipate was how much damage that would do to our core
financial institutions, as it did. And that led to the crisis.
Senator Lee. Yes. These things are hard to anticipate.
Chairman Bernanke. Yes.
Senator Lee. Would it be fair to say that debt can create
risks that are, by their very nature, difficult to anticipate?
And once they arise, also are difficult to address?
Chairman Bernanke. Excessive leverage can create
instability; that's correct. But as I said, what we are seeing
in households, and particularly in corporations, is a lot of
deleveraging. Much stronger balance sheets. More equity in the
case of banks and firms than we saw prior to the crisis.
Senator Lee. So what would you say to those who might be
concerned that we could be facing a similar crisis coming up as
we saw in the mid-2000s?
Chairman Bernanke. Well first, again the indicators like
asset prices, house prices, leverage, credit growth, all those
things look very different today than they did before the
crisis.
Secondly, there is a whole lot of reform going on. Very bad
mortgages were being made, as you know. And there has been a
considerable amount of tightening up of the laws protecting
consumers.
There have been considerable increases in the amount of
capital that banks have to hold, and so on. So a lot has been
done. And I am not saying that this work is completely done,
but we have certainly done a lot to make the system more
resilient.
Senator Lee. Thank you very much. I see my time has
expired. Thank you, Chairman Brady.
Chairman Brady. Thank you. Senator Toomey is recognized for
five minutes.
Senator Toomey. Thank you, Mr. Chairman, and thank you,
Chairman Bernanke for joining us again.
Just a quick sort of follow up on the nature of very
accommodative monetary policy. Isn't it true as a general
matter that very accommodative monetary policy has the
tendency, to the extent that it is successful at all, to bring
economic activity that would otherwise occur in the future
closer to the present day, rather than to increase the total
amount of economic activity that occurs over the long run?
Chairman Bernanke. To some extent that is correct. But we
have a situation now where, for example, home building is well
below what can be sustained in the longer term. And so the more
quickly we can get back to that more normal level, the more
quickly our economy will be at something close to full
employment.
Senator Toomey. Be that as it may, I just think it is an
important point to consider that accommodative monetary policy
is not really a net growth strategy. It probably has a bigger
impact on the timing of economic activity than the total
amount.
Chairman Bernanke. We are trying to mitigate the effects of
the Recession, but we cannot affect long-term growth very much.
That's right.
Senator Toomey. Right. Another point, just a quick follow
up on Senator Coats and Senator Lee who alluded to asset
bubbles that have occurred in the past. I think it is clear to
virtually everyone that we had a residential housing bubble in
the last decade, and I just worry that this extremely
accommodative and unprecedented policy can manifest itself in
unpredictable ways.
And when we see the recent surge in housing prices,
extraordinarily low yield on junk bonds, huge rally in
equities, high agricultural land prices, it is not--as you
point out, it is very hard to know at any point in time exactly
what an asset ought to be worth, but it worries me that this is
going to manifest itself in unpredictable ways.
The last point I would just want to raise is you have
discussed the general strategy for exiting when that day comes,
but always with an implication that there will be this orderly
transition. And I just know you're aware of this, but I think
it is important to underscore that it is hard to predict how
the markets will respond when the biggest holder of fixed-
income securities in the history of the world decides it has to
sell them. And you might decide you have to sell them. I know
you may decide you can just let them run off, but that may not
be enough. And I just think there are very significant risks
that we are taking by accumulating a portfolio of this scale.
Do you want to just comment on that briefly?
Chairman Bernanke. Well, I do not disagree that this is not
easy and requires good communication. We have improved our
communication----
Senator Toomey. By the way, I would like to commend you for
that. You have provided I think more transparency, more
communication, and more guidance than the Fed has, to my
knowledge, ever provided certainly in recent history and I do
think that is constructive.
Chairman Bernanke. Thank you.
I guess I would just say that there is no risk-free
strategy here. I mean, inflation is 1 percent. Unemployment is
still high. So we could tighten monetary policy and address
some of the issues that you have in mind. I think it would also
include a big market correction if we moved very quickly and
unexpectedly.
Senator Toomey. Which might suggest that the reason the
market is where it is is because of the monetary policy rather
than the underlying fundamentals.
Chairman Bernanke. Well, but it may be because the market
thinks that monetary policy is creating more profits and
growth.
Senator Toomey. That is possible. A quick follow up to
comments you have made in the past about the swaps push-out
provision in Dodd-Frank. I have legislation to allow that, much
but not all, much of that activity that is currently required
to be pushed out to the curb back in the banks, which I think
is a better way for financial institutions to manage risk and a
better way for end-users to be able to use these products.
Do you still share the view that it is a good idea to
repeal parts of the swap push-out?
Chairman Bernanke. Yes. The Federal Reserve had concerns
about this prior to the enactment of the law, and we still have
concerns about it.
Senator Toomey. The last thing I want to mention is, there
are August 9th, 2011, minutes of an FOMC meeting that contain
notes on an August 1 videoconference in which there is a
reference--and I am going to read. I will quote from a portion
of it. It refers to, quote:
``Plans that the Federal Reserve and the Treasury have
developed regarding the processing of federal payments,
potential implications for bank supervision and regulatory
policies, and possible actions that the Federal Reserve could
take if disruptions to market functioning posed a threat to the
Federal Reserve's economic objectives.''
Of course this was in the context of the debt-limit
impasse. So clearly there were plans regarding how to deal with
the processing of Fed payments, for instance, and other things.
Could you give us a sense of what those plans consist of, and
what you can tell us about those plans?
Chairman Bernanke. Well my memory won't be complete, but we
looked at our systems and our ability to make payments to
principal and interest holders. For the most part, we found
that we were able to do that, with a few possible exceptions,
people holding savings bonds and a few things that are not as
easily connected to the system.
We also had some discussion of the kind of policy we would
have with banks--for example, discount window lending; would we
accept defaulted Treasury; and all kinds of things that were
contingency planning in case that this were to happen.
What we did not do was directly engage the private sector
for any contingency planning. We were mostly looking at our
internal systems. We are the agent of course of the Treasury,
and it is our job to do whatever they tell us to do. And we
were just working through our capacity both as an agent
managing the payment system, and also as a bank supervisor to
deal with a possible default if the debt ceiling was not
raised.
Senator Toomey. Okay, I see my time has expired. Thank you,
Mr. Chairman.
Chairman Brady. Thank you. Former Chairman, Senator Bob
Casey is recognized for five minutes.
Senator Casey. Mr. Chairman, thank you. Vice Chair
Klobuchar, thank you for making this opportunity available to
us.
And Chairman Bernanke, we are grateful for your presence
here and your testimony and, I have to say, as well, for the
work you have done to deal with a set of economic circumstances
that we have rarely faced in American history. So you brought
not just a lot of focus, but also a lot of passion, and we
appreciate that.
I really wanted to focus just on one issue. I am not sure
it has been raised yet, but if it has I think it always bears
even more examination. The issue is tax reform.
If there is one area of real consensus in Washington and
across the country, there is a lot of consensus--and here it
happens to be bipartisan--that we have got to simplify the Tax
Code. We have got to make it a much more workable tax system
for individuals and for businesses; all kinds of ways to do
that.
The hard part is getting consensus in order to move
forward. The good news here--I do not want to overstate this
but it is important to assert it--is that we have had two
chairmen, Chairman Baucus in the Finance Committee the last
several years, and Chairman Camp, the House Ways and Means,
working together individually and their staffs to try to tackle
this, and processes or mechanics are underway in both places.
For example, every Thursday in the Finance Committee we sit
down around the table and for at least an hour or more go
through elements of the Tax Code. That is all the good news.
And I think it is moving in the right direction.
The challenge is getting consensus. The question I have for
you--and maybe one or two--the basic question is: Can you give
an opinion, or assess the impact, I am assuming it will be
positive but I would like to hear about this, on passage of a
substantial bipartisan reform of the Tax Code?
Chairman Bernanke. Well first I would just make the
observation that such a major action taken in a bipartisan
basis would itself be confidence-inspiring.
I think most everybody on both sides of the aisle agrees
that the Tax Code is extremely complex and distorts economic
decisions in a lot of ways. So I think if it were done in a way
that simplified it, made it more economically efficient and
rational, I think that would be very positive. And I hope that
you and your colleagues can make progress on that.
Senator Casey. Is there any one part of the Tax Code that
is of particular significance in terms of the adverse impact it
has on either business activity or economic growth? I realize
there may be more than one, but if there is one that you think
is particularly difficult to manage?
Chairman Bernanke. Well the very difficult problem you face
is the following: Most economists would argue that an efficient
Tax Code is one that has a relatively broad base and low
marginal rates.
But low marginal rates is easy, but ``broad base'' means
restricting or limiting popular deductions and credits. So that
is the goal. But the political challenge is to figure out how
to do that.
And as you know, in the income tax, for example, the
personal income tax, the biggest deductions are housing,
charitable, state and local government, and the health care
exemption, which are all obviously very popular and have their
own purposes.
So finding a way to deal with that issue I think is the
most challenging part but has the biggest payoff, if you can
find ways to again broaden the base and lower the tax rate.
Senator Casey. And I hear about it a lot, and I know we all
do, this sense that businesses have that there are various, or
I would say a big measure, or substantial areas of uncertainty:
one is the Tax Code, another is the economy generally. Frankly,
one of the areas of uncertainty is what the Congress will or
will not do, or hasn't done.
And it is my belief if we can get a bipartisan tax reform
agreement, it would remove at least one element of uncertainty.
I know my time has almost expired, and as a former Chair I want
to be on the right side of Chairman Brady.
[Laughter.]
Chairman Brady. Thank you, sir. Representative Duffy is
recognized for five minutes.
Representative Duffy. Thank you, Mr. Chairman.
To follow up on Mr. Casey's questioning just briefly, not
only are we here to hopefully get bipartisan support for reform
of our Tax Code but hopefully we will have bipartisan support
for fair implementation of our Tax Code. But that is not this
hearing.
Thanks for coming, Mr. Chairman. You testified with regard
to the need to in essence keep the spigots going with regard to
monetary and fiscal policy; that you are going to continue to
print money, drive interest rates down; that we should continue
to borrow and spend on our end in the short term to help grow
the economy and work on our debt in the long term.
I am sure you are well aware of these numbers, but if you
look at how much we have spent since 2008, the Federal
Government in 2008 spent $2.9 trillion. In 2009, during the
course of the Stimulus Bill, we spent $3.5 trillion. So the
year of the Stimulus Bill, $3.5 trillion, a half a trillion
dollar jump.
This year, the CBO projects us to spend $3.4 trillion. So
we are almost spending this year the same amount we spent in
the year of the $800 billion Stimulus Bill. But your testimony
today is that the cuts have been too significant. We need to
actually spend more in conjunction with your printing.
Could you explain that a little further for me? Why do we
need to spend more when we are already a half a trillion
dollars more in spending from fiscal year 2008?
Chairman Bernanke. Well first I did not say ``spending.'' I
talked about the whole package, which included tax increases
and elimination of the payroll tax cut. I'm saying put all that
together and it is a drag on the economy. Since the stimulus
the government has been tightening its belt pretty
significantly. I mentioned in my testimony that there are
800,000 fewer government employees today than there were a few
years ago. And I am not advocating. I am not here to advocate a
major new stimulus program.
I am simply saying that a rebalancing between a somewhat
slower tightening in the near term, and more aggressive and
systematic attempt to address the longer term imbalances where
the big problems really are, I think that would be better.
And please don't misunderstand me. I am not in any way
denying the importance of fiscal responsibility. I just think
it is not the best way to go about it to focus entirely on the
short term and ignore the long term.
Representative Duffy. And I would agree with you on that
point. One of the problems in this town is that we see the
long-term implications of the course that we are on. And you
are well aware of the politics in these two chambers and with
the White House. And you have seen our side.
I think aggressively talking about the long-term
implications of our aging population and the impact on
Medicare, and that I think you would agree is the driver of our
debt. Yes? You would agree with that, right?
Chairman Bernanke. On the spending side, health care costs
and aging are very important, yes.
Representative Duffy. And what program does that spending
come from?
Chairman Bernanke. Medicare and Medicaid.
Representative Duffy. Right. So you know that on our side
of the aisle we are trying to actually reform it and make it
sustainable. And one of the frustrations is we are not able to
get buy-in with others to actually join us in that effort.
It is one thing to say, listen, I don't like the
Republicans' plan, but then the other side has to put out a
plan that actually makes it sustainable, too. Wouldn't you
agree?
Chairman Bernanke. I'm sorry?
Representative Duffy. That makes Medicare sustainable in
the long term.
Chairman Bernanke. We certainly want to do that, yes.
Representative Duffy. Yes. And both sides should put out
plans that make Medicare sustainable so they can negotiate.
Correct?
Chairman Bernanke. Well I don't want to get into
negotiations, but----
Representative Duffy. I'm talking policy-wise.
Chairman Bernanke. From a policy perspective, yes, we want
Medicare to be sustainable and we want the budget overall to be
sustainable.
Representative Duffy. And we want two sides to put out
plans that make Medicare sustainable, right?
Chairman Bernanke. There needs to be, obviously, some
bipartisan way of negotiating whatever it is you're going to
do.
Representative Duffy. And to negotiate that, both sides put
out plans. One of my concerns with your testimony, when you
talk about the headwinds, is you didn't talk about regulations.
When I talk to my small business owners, people back in
Wisconsin, they are concerned about the things you mentioned
but they are also concerned about the rules, the regulations,
the red tape. Government is getting in their way when they're
looking at expanding and growing their business.
When you have someone who is looking at starting a
business, they will cite rules and regulations, and government
interference as a problem. And I guess I see that as one of the
headwinds as well, and that wasn't referenced. I wonder if you
see that as a concern?
Chairman Bernanke. It is a concern. Smart regulation is
very important. I wonder, though, whether these regulations are
ones that have just been imposed, or whether they are things
that have been in place for a long time?
And talking about headwinds, I was looking at factors that
were specific to this recovery as opposed to the longer term
growth issues.
Representative Duffy. And just quickly, I know your term is
up in January?
Chairman Bernanke. Right.
Representative Duffy. If offered a second term by the
President, would you accept?
Chairman Bernanke. I'm not prepared to answer that question
now.
Representative Duffy. Okay. Some of us are concerned about
the policies that have been implemented and the long-term
impacts that won't take effect in the next six months but will
impact us three, four, five, and six years down the road.
Thanks for your testimony.
Chairman Brady. Thank you, Representative Duffy, for
waiting till the very last moment to slip that question in.
[Laughter.]
Vice Chair Klobuchar. Yeah.
Chairman Brady. Chairman Bernanke, thank you for being
here. I think the Fed played a critical role in calming the
financial crisis. I do not know that I agree with the assertion
that everything good in the economy, including corporate
earnings, has occurred because of adroit monetary policy. I
think the economy is more complex in the private sector, more
resilient on its own. I just believe that at this point in the
recovery, while it is very fragile, it really is the fiscal
roadblocks, aside from Europe and some other issues, are really
key to getting this economy going.
We are going to continue to explore monetary policy, exit
strategy, timing, and other issues in future hearings. Mr.
Chairman, thank you for being here today.
Chairman Bernanke. Thank you, sir.
(Whereupon, at 11:45 a.m., Wednesday, May 22, 2013, the
hearing was adjourned.)
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Kevin Brady, Chairman, Joint Economic
Committee
Chairman Bernanke, welcome again to the Joint Economic Committee.
Thank you for your service as Chairman of the Federal Reserve. You
deserve great credit for the leadership that calmed America's financial
crisis in 2008.
Four and half years after that crisis and nearly four years after
the recession ended, the Fed is still engaging in extraordinary
monetary actions and may continue doing so well into the future. Today,
this Committee will examine how these actions have affected jobs and
middle class Americans, and how and when the Fed will exit its current
accommodative policies.
America's economy is improving, but faces significant challenges.
We are experiencing the worst economic recovery since World War II. The
``growth gap'' between this recovery and an average post-war recovery
is large and growing. We are missing 4.1 million private sector jobs
and $1.2 trillion from real GDP.
More troubling is that many economists are predicting a ``new
normal'' for America where long-term growth is diminished. The
Congressional Budget Office recently reduced its estimate for future
growth in real potential GDP from 3.2 percent to 2.2 percent. A one-
percentage point difference may not sound like much, but it is huge. A
one-percent growth gap means a $30 trillion smaller economy in 2062--in
constant dollars.
The unemployment rate has declined, which is very encouraging, but
there are red flags that we shouldn't ignore.
Twenty million Americans cannot find a full-time job. Millions
more--from recent college graduates to workers in their prime earning
years--have simply given up looking for work. Long-term unemployment
remains historically high, and the labor force participation rate is at
a 35-year low.
While it's encouraging that since the recession hit bottom over 6
million Americans have found work, more than that--over 8 million
Americans--have been forced onto food stamps. Regrettably, one-in-six
Americans must now rely on food stamps.
With strong earnings reports and Fed's accommodative monetary
policy, there's no question that Wall Street is roaring, but Main
Street continues to struggle. Since the recession ended, in real terms,
the S&P 500 Total Return Index has risen by 74.2 percent, while
disposable income per person has only advanced a mere 2.3 percent.
That means that over the last four years the real disposable income
for Joe Sixpack increased a mere $745. In an average recovery since
1960, he would have $3,604 more in his pocket by now.
Extraordinarily low interest rates have clearly boosted housing
prices and housing construction with positive economic effects.
However, those same low rates are punishing seniors, savers, pension
funds and insurance products. Families may now feel more secure about
their house, but less secure about their income and job prospects.
As for the Fed's unemployment rate targeting, quantitative easing
has run out of steam. Long-term interest rates are already at a near
70-year low. Banks have $1.9 trillion in excess reserves at the Fed,
and non-financial corporations have $1.5 trillion sitting on the
sidelines. More liquidity and lower long-term rates cannot solve the
problems that are holding back job creation in America.
Business investment in new buildings, equipment and software--which
drive job creation--remains the missing ingredient in this recovery.
Monetary policy, no matter how thoughtfully applied, has its
limits. It cannot fix poor Washington budget, regulatory and tax
policies that are deterring business investment and the jobs that come
with it.
I don't question the intention of current Fed policy to fulfill its
dual mandate, but I question the policy's effects on employment and
worry about its future risks.
In the near term, these extraordinary monetary actions have become
an enabler of bad fiscal policy: allowing President Obama and Congress
to avoid the tough and necessary decisions that would clear the
roadblocks to a stronger economy: such as addressing America's long-
term financial sustainability, creating a pro-growth tax code, re-
balancing regulation, and addressing the harmful economic effects of
the President's Affordable Care Act.
In the long term, the Fed's extraordinary monetary actions pose
three risks to our economy:
First, the Fed may be inflating new asset price bubbles.
Second, large excess reserves at the Fed could become the
fuel for future inflation when economic growth accelerates unless the
Fed acts swiftly to contract its balance sheet.
Third, the Fed's expansive balance sheet creates a
perverse incentive for future financial repression, an economic term,
which means channeling domestic savings to the federal government to
lower its interest costs.
Since 2009, the Fed has purchased the equivalent of 24 percent
of all newly issued Treasuries. When growth picks up, the Fed
cannot raise its target rate for federal funds and sell long-
term Treasuries without recognizing substantial losses on its
balance sheet, creating uncertainty.
To avoid that, the Fed will likely boost the interest rate paid
to banks on their reserves and increase reserve requirements,
which restrict economic growth by limiting bank loans to small
businesses and families. The net effect is ``financial
repression''--redirecting credit from the private sector
through the Fed to the Treasury--to help contain federal
interest costs.
Given these risks and the limits to monetary policy in the current
economic recovery, the Federal Reserve should begin now to carefully
exit from its extraordinary monetary actions and return to a more
predictable, rules-based monetary policy that focuses on maintaining
the purchasing power of the U.S. dollar over time.
Begin now with clear communication to the market, that will lessen
uncertainty and form the best long-term foundation for maximum economic
growth for America.
We intend to explore the Fed's exit strategy in detail today.
Chairman Bernanke, I look forward to your testimony.
__________
Prepared Statement of Hon. Amy Klobuchar, Vice Chair, Joint Economic
Committee
Chairman Bernanke, thank you for being here. I look forward to your
testimony on the state of the economy and your thoughts on the short-
term and long-run issues facing the U.S. economy.
The economy has added private-sector jobs for 38 straight months.
During this time, 6.8 million private-sector jobs have been created.
Key economic indicators are also showing strength--the housing market
is recovering, and credit conditions continue to improve. But we know
there is more work to do.
My hope is that this hearing will allow us to talk about potential
solutions that can move the country forward. And because of the Fed's
two objectives for the nation's monetary policy--maximum employment and
stable prices--I'm eager to hear your thoughts, Chairman Bernanke, on
what the Fed is doing to stimulate lending and economic activity.
One issue that I know we are all concerned about is getting our
fiscal house in order.
In the past two years, Congress has made some progress in reducing
the deficit. We've already achieved $2.4 trillion in deficit reduction
and the goal of $4 trillion is within our grasp.
Last week, the Congressional Budget Office reported that the
deficit will fall to $642 billion this year, $200 billion less than
what the CBO projected just three months ago. The better numbers
reflect good news in housing and larger than expected increases in tax
revenues. But I believe that resting on these numbers would be a
mistake. I think we're closer to reaching a new deficit agreement than
many people believe.
There is bipartisan agreement on this. At a hearing this Committee
held in March, former Republican Senator Judd Gregg shared a quote from
the Foreign Minister of Australia, who said, ``The United States is one
debt deal away from leading the entire world out of [its] economic
doldrums.'' I think that's exactly right.
But, it's only going to happen if we work in a bipartisan manner to
get a deal done. I believe that the budget the Senate passed, which I
voted for, is the right approach.
It's balanced--with targeted spending cuts to replace sequestration
and new revenues from closing loopholes and ending wasteful spending in
the tax code that would stabilize our debt-to-GDP ratio at around 70%.
You have warned, Chairman Bernanke, that cutting too much too soon
could lead to a sharp contraction. I quote you a lot on that because
for any woman who has gone through labor it is a highly memorable
description. It is one of the reasons I believe deficit reduction must
be paired with economic growth.
Our ultimate goal isn't simply a balanced budget; it's a budget
that has balance. As we work towards that goal, we must avoid a repeat
of the debt ceiling brinkmanship in the summer of 2011 that rattled
financial markets, led to a downgrade of the U.S. credit rating and
unnecessarily harmed our economy.
When I asked you about the debt ceiling showdown at a JEC hearing
in the fall of 2011, you answered bluntly that it's ``no way to run a
railroad.''
I agree. We must do better this time. And we must continue pressing
policies that will help the economy: immigration reform, a long-term
farm bill, work-skills training for our own students, regulatory reform
and comprehensive tax reform. Part of this is, of course, smart Federal
Reserve policies.
Since the financial crisis began in 2007, the Fed has used many
tools to bolster the economy. It has kept short-term interest rates
near zero since late 2008, and has taken action to keep longer-term
interest rates and mortgage interest rates low.
As you and I have discussed, this makes it hard on savers, yet in
the past three years, Americans have saved more than 4 percent of their
incomes.
The Fed has also taken steps to open up its policy-making process,
expand communication, provide more specific guidance and enhance the
transparency of monetary policy.
Finally, there has been an ongoing discussion about changing the
Fed's goals to focus solely on price stability--and we held a good
hearing on this issue.
In my view, now is not the time for the Fed to take its eye off
promoting employment. My hope is that Democrats and Republicans can
come together to find solutions that put more Americans back to work.
The unemployment rate, while heading in the right direction,
remains at 7.5 percent, well above the 6.5 percent level the Fed
committed to reaching before changing course on interest rates.
At the same time, inflation is well below the Fed target of 2
percent. It's at about 1 percent over the past 12 months.
I believe we've turned the corner and our economy is getting
stronger. We have had almost three and a half years of private-sector
job growth.
While this is good news, we have much more to do. I look forward to
discussing how we can build on this economic progress. Chairman
Bernanke, thank you for being here and for your testimony this morning.
__________
Prepared Statement of Ben S. Bernanke, Chairman, Board of Governors of
the Federal Reserve System
Chairman Brady, Vice Chair Klobuchar, and other members of the
Committee, I appreciate this opportunity to discuss the economic
outlook and economic policy.
current economic conditions
Economic growth has continued at a moderate pace so far this year.
Real gross domestic product (GDP) is estimated to have risen at an
annual rate of 2\1/2\ percent in the first quarter after increasing
1\3/4\ percent during 2012. Economic growth in the first quarter was
supported by continued expansion in demand by U.S. households and
businesses, which more than offset the drag from declines in government
spending, especially defense spending.
Conditions in the job market have shown some improvement recently.
The unemployment rate, at 7.5 percent in April, has declined more than
\1/2\ percentage point since last summer. Moreover, gains in total
nonfarm payroll employment have averaged more than 200,000 jobs per
month over the past six months, compared with average monthly gains of
less than 140,000 during the prior six months. In all, payroll
employment has now expanded by about 6 million jobs since its low
point, and the unemployment rate has fallen 2\1/2\ percentage points
since its peak.
Despite this improvement, the job market remains weak overall: The
unemployment rate is still well above its longer-run normal level,
rates of long-term unemployment are historically high, and the labor
force participation rate has continued to move down. Moreover, nearly 8
million people are working part time even though they would prefer
full-time work. High rates of unemployment and underemployment are
extraordinarily costly: Not only do they impose hardships on the
affected individuals and their families, they also damage the
productive potential of the economy as a whole by eroding workers'
skills and--particularly relevant during this commencement season--by
preventing many young people from gaining workplace skills and
experience in the first place. The loss of output and earnings
associated with high unemployment also reduces government revenues and
increases spending on income-support programs, thereby leading to
larger budget deficits and higher levels of public debt than would
otherwise occur.
Consumer price inflation has been low. The price index for personal
consumption expenditures rose only 1 percent over the 12 months ending
in March, down from about 2\1/4\ percent during the previous 12 months.
This slow rate of inflation partly reflects recent declines in consumer
energy prices, but price inflation for other consumer goods and
services has also been subdued. Nevertheless, measures of longer-term
inflation expectations have remained stable and continue to run in the
narrow ranges seen over the past several years. Over the next few
years, inflation appears likely to run at or below the 2 percent rate
that the Federal Open Market Committee (FOMC) judges to be most
consistent with the Federal Reserve's statutory mandate to foster
maximum employment and stable prices.
Over the nearly four years since the recovery began, the economy
has been held back by a number of headwinds. Some of these headwinds
have begun to dissipate recently, in part because of the Federal
Reserve's highly accommodative monetary policy. Notably, the housing
market has strengthened over the past year, supported by low mortgage
rates and improved sentiment on the part of potential buyers. Increased
housing activity is fostering job creation in construction and related
industries, such as real estate brokerage and home furnishings, while
higher home prices are bolstering household finances, which helps
support the growth of private consumption.
Severe fiscal and financial strains in Europe, by weighing on U.S.
exports and financial markets, have also restrained U.S. economic
growth over the past couple of years. However, since last summer,
financial conditions in the euro area have improved somewhat, which
should help mitigate the economic slowdown there while also reducing
the headwinds faced by the U.S. economy. Also, credit conditions in the
United States have eased for some types of loans, as bank capital and
asset quality have strengthened.
fiscal policy
Fiscal policy, at all levels of government, has been and continues
to be an important determinant of the pace of economic growth. Federal
fiscal policy, taking into account both discretionary actions and so-
called automatic stabilizers, was, on net, quite expansionary during
the recession and early in the recovery. However, a substantial part of
this impetus was offset by spending cuts and tax increases by state and
local governments, most of which are subject to balanced-budget
requirements, and by subsequent fiscal tightening at the federal level.
Notably, over the past four years, state and local governments have cut
civilian government employment by roughly 700,000 jobs, and total
government employment has fallen by more than 800,000 jobs over the
same period. For comparison, over the four years following the trough
of the 2001 recession, total government employment rose by more than
500,000 jobs.
Most recently, the strengthening economy has improved the budgetary
outlooks of most state and local governments, leading them to reduce
their pace of fiscal tightening. At the same time, though, fiscal
policy at the federal level has become significantly more restrictive.
In particular, the expiration of the payroll tax cut, the enactment of
tax increases, the effects of the budget caps on discretionary
spending, the onset of the sequestration, and the declines in defense
spending for overseas military operations are expected, collectively,
to exert a substantial drag on the economy this year. The Congressional
Budget Office (CBO) estimates that the deficit reduction policies in
current law will slow the pace of real GDP growth by about 1\1/2\
percentage points during 2013, relative to what it would have been
otherwise.\1\ In present circumstances, with short-term interest rates
already close to zero, monetary policy does not have the capacity to
fully offset an economic headwind of this magnitude.
---------------------------------------------------------------------------
\1\ See Congressional Budget Office (2013), The Budget and Economic
Outlook: Fiscal Years 2013 to 2023 (Washington: CBO, February),
available at www.cbo.gov/publication/43907.
---------------------------------------------------------------------------
Although near-term fiscal restraint has increased, much less has
been done to address the federal government's longer-term fiscal
imbalances. Indeed, the CBO projects that, under current policies, the
federal deficit and debt as a percentage of GDP will begin rising again
in the latter part of this decade and move sharply upward thereafter,
in large part reflecting the aging of our society and projected
increases in health-care costs, along with mounting debt service
payments. To promote economic growth and stability in the longer term,
it will be essential for fiscal policymakers to put the federal budget
on a sustainable long-run path. Importantly, the objectives of
effectively addressing longer-term fiscal imbalances and of minimizing
the near-term fiscal headwinds facing the economic recovery are not
incompatible. To achieve both goals simultaneously, the Congress and
the Administration could consider replacing some of the near-term
fiscal restraint now in law with policies that reduce the federal
deficit more gradually in the near term but more substantially in the
longer run.
monetary policy
With unemployment well above normal levels and inflation subdued,
fostering our congressionally mandated objectives of maximum employment
and price stability requires a highly accommodative monetary policy.
Normally, the Committee would provide policy accommodation by reducing
its target for the federal funds rate, thus putting downward pressure
on interest rates generally. However, the federal funds rate and other
short-term money market rates have been close to zero since late 2008,
so the Committee has had to use other policy tools.
The first of these alternative tools is ``forward guidance'' about
the FOMC's likely future target for the federal funds rate. Since
December, the Committee's postmeeting statement has indicated that its
current target range for the federal funds rate, 0 to \1/4\ percent,
will be appropriate ``at least as long as the unemployment rate remains
above 6\1/2\ percent, inflation between one and two years ahead is
projected to be no more than a half percentage point above the
Committee's 2 percent longer-run goal, and longer-term inflation
expectations continue to be well anchored.'' This guidance underscores
the Committee's intention to maintain highly accommodative monetary
policy as long as needed to support continued progress toward maximum
employment and price stability.
The second policy tool now in use is large-scale purchases of
longer-term Treasury securities and agency mortgage-backed securities
(MBS). These purchases put downward pressure on longer-term interest
rates, including mortgage rates. For some months, the FOMC has been
buying longer-term Treasury securities at a pace of $45 billion per
month and agency MBS at a pace of $40 billion per month. The Committee
has said that it will continue its securities purchases until the
outlook for the labor market has improved substantially in a context of
price stability. The Committee also has stated that in determining the
size, pace, and composition of its asset purchases, it will take
appropriate account of the likely efficacy and costs of such purchases
as well as the extent of progress toward its economic objectives.
At its most recent meeting, the Committee made clear that it is
prepared to increase or reduce the pace of its asset purchases to
ensure that the stance of monetary policy remains appropriate as the
outlook for the labor market or inflation changes. Accordingly, in
considering whether a recalibration of the pace of its purchases is
warranted, the Committee will continue to assess the degree of progress
made toward its objectives in light of incoming information. The
Committee also reiterated, consistent with its forward guidance
regarding the federal funds rate, that it expects a highly
accommodative stance of monetary policy to remain appropriate for a
considerable time after the asset purchase program ends and the
economic recovery strengthens.
In the current economic environment, monetary policy is providing
significant benefits. Low real interest rates have helped support
spending on durable goods, such as automobiles, and also contributed
significantly to the recovery in housing sales, construction, and
prices. Higher prices of houses and other assets, in turn, have
increased household wealth and consumer confidence, spurring consumer
spending and contributing to gains in production and employment.
Importantly, accommodative monetary policy has also helped to offset
incipient deflationary pressures and kept inflation from falling even
further below the Committee's 2 percent longer-run objective.
That said, the Committee is aware that a long period of low
interest rates has costs and risks. For example, even as low interest
rates have helped create jobs and supported the prices of homes and
other assets, savers who rely on interest income from savings accounts
or government bonds are receiving very low returns. Another cost, one
that we take very seriously, is the possibility that very low interest
rates, if maintained too long, could undermine financial stability. For
example, investors or portfolio managers dissatisfied with low returns
may ``reach for yield'' by taking on more credit risk, duration risk,
or leverage. The Federal Reserve is working to address financial
stability concerns through increased monitoring, a more systemic
approach to supervising financial firms, and the ongoing implementation
of reforms to make the financial system more resilient.
Recognizing the drawbacks of persistently low rates, the FOMC
actively seeks economic conditions consistent with sustainably higher
interest rates. Unfortunately, withdrawing policy accommodation at this
juncture would be highly unlikely to produce such conditions. A
premature tightening of monetary policy could lead interest rates to
rise temporarily but would also carry a substantial risk of slowing or
ending the economic recovery and causing inflation to fall further.
Such outcomes tend to be associated with extended periods of lower, not
higher, interest rates, as well as poor returns on other assets.
Moreover, renewed economic weakness would pose its own risks to
financial stability.
Because only a healthy economy can deliver sustainably high real
rates of return to savers and investors, the best way to achieve higher
returns in the medium term and beyond is for the Federal Reserve--
consistent with its congressional mandate--to provide policy
accommodation as needed to foster maximum employment and price
stability. Of course, we will do so with due regard for the efficacy
and costs of our policy actions and in a way that is responsive to the
evolution of the economic outlook.
__________
Questions for The Honorable Ben Bernanke, Chairman, Board of Governors
of the Federal Reserve System from Senator Daniel Coats (R-Indiana)
1. Chairman Bernanke, I want to follow up with you concerning the
Federal Reserve's plans with regard to adopting Basel III capital rules
for the insurance sector, an action that I believe could lead to
unintended results. Specifically, as you know, concerns have been
expressed over the fact that those capital rules are not an appropriate
fit for insurance companies.
Are you at the Fed able to appropriately tailor capital standards
for insurers, and in so doing utilize the long-established state risk-
based capital regime designed for the insurance business model?
Do you believe federal regulators fully understand the impact Basel
III capital rules would have on insurance companies, consumers of
insurance products, and our economy? I strongly urge the Federal
Reserve to consider those impacts through a thorough Quantitative
Impact Study. Basel III has been developed over the years for the bank
model, not for insurers. Insurance consumers--and our economy--deserve
no less than a full and public understanding of the impact these bank-
like capital rules would have on the life insurance industry prior to
finalization of the Basel III rule.
Section 171 of the Dodd-Frank Act, by its terms, requires the
appropriate Federal banking agencies to establish minimum capital
requirements for bank holding companies (BHCs) and savings and loan
holding companies (SLHCs) that ``shall not be less than'' ``nor
quantitatively lower than'' the generally applicable capital
requirements for insured depository institutions. Section 171 does not
contain an exception from these requirements for an insurance company
that is a BHC or an SLHC, or for a BHC or an SLHC that controls an
insurance company.
To allow the Board an additional opportunity to consider prudent
approaches to establish capital requirements for SLHCs that engage
substantially in insurance activities within the requirements of the
terms of section 171, the Board, on July 2, 2013, determined to defer
application of the new Basel III capital framework to SLHCs with
significant insurance activities (i.e., those with more than 25 percent
of their assets derived from insurance underwriting activities other
than credit insurance) and to SLHCs that are themselves state regulated
insurance companies. After considering the concerns raised by
commenters regarding the proposed application of the proposed
regulatory capital rules to SLHCs with significant insurance
activities, the Board concluded that it would be appropriate to take
additional time to evaluate the appropriate capital requirements for
these companies in light of their business models and risks. Among
other issues, commenters argued that the final capital rules should
take into account insurance company liabilities and asset-liability
matching practices, the risks associated with separate accounts, the
interaction of consolidated capital requirements with the capital
requirements of state insurance regulators, and differences in
accounting practices for banks and insurance companies. The Board is
carefully considering these issues in determining how to move forward
in developing a capital framework for these SLHCs, consistent with
section 171 of the Dodd-Frank Act.