WASHINGTON (Reuters) - The following are highlights from a congressional Joint Economic Committee hearing on Tuesday with Federal Reserve Chairman Ben Bernanke testifying on the economic outlook.
“I do think that China’s currency policy, besides creating problems for them — in particular they’ve dealt with some inflation lately which is a result to a large extent of their currency policy — has been to some extent preventing global adjustment. That is, we have a two-speed recovery, where emerging market economies have been growing very quickly and advanced industrial countries have been growing very slowly. A more balanced growth path could be achieved if there was greater flexibility in currencies. China’s currency policy not only affects obviously U.S.-China relations, but it also affects third party currency policies as well.”
“There is a variety of things under the heading of communication. Giving information to the public about how long and under what conditions we would hold interest rates low, that’s one way of providing more stimulus. Of course we could continue to buy securities in the open market, that would be a second way.
A third, relatively small step would be to reduce the interest that we pay on reserves that the banks hold with the Federal Reserve.”
BERNANKE ON PLANS IF DEBT-LIMIT HIKE HAD FAILED:
“We certainly did have contingency plans. The Fed is the fiscal agent of the Treasury, we are technically responsible for getting the payments done so we were working on plans on how we would address the situation if the government had to cut back on what it was paying. So we were dealing with that set of issues and we were also looking at what we might be able to do to try to reduce the impact on financial markets and on the banking system. But we were quite concerned that the failure of Congress to pass the debt limit in a timely way would create a crisis of confidence in the financial system and we weren’t quite sure that we had tools to address that.”
“Housing is very central to the situation that we have now. Housing is usually a big part of the recovery process and here it’s not doing anything. Many people are under water, that’s affecting them financially. Their loss of equity means they are poor, they are less willing to spend. So addressing the housing situation is very important. The Fed has done a lot to try and bring mortgage rates down. But that’s not effective if people can’t get mortgage loans.”
“The dollar is about the same place it was about the summer of 2008. It’s gone up and down with flows of flight to safety, but it hasn’t really been on a trend.”
BERNANKE ON INTEREST-RATE CAPS FOR CREDIT CARDS:
“As long as there’s complete clarity about the conditions of the card, and people understand what the provisions are, I’m not quite sure what the basis would be (for capping interest rates on bank credit cards).”
“The efforts just to keep inflation close to the 2 percent target, the fact that it’s close to 2 percent now suggests we would have had to do most of what we had done just to keep inflation there.
The evidence is that all the things we have done have not driven inflation above the price stability level.”
“We are very confident that on a technical level we can do so. We will be paying very careful attention to inflation as we make that determination. I assure you that we are quite confident that we can reverse our policies when necessary.”
“There are two sides to that. On the one side, clearly ... we’ve got flight-to-quality coming into U.S. debt. As people see all kinds of problems in the global financial system they’re buying U.S. debt and driving yields of U.S. debt down to very low levels. That being said I think everybody appreciates now that you can’t run large deficits forever. We see that in other countries and in fact S&P downgraded U.S. Treasuries. So clearly it’s an issue that we have to address and it’s not something you can wait 10 years.”
“I think they appreciate how much is at stake. I mean it’s not just short term stability, it’s the continuation of their common European project, it’s the continuation of their common currency. I think there’s a strong desire and will to achieve success here, but again, the process has been slowed by the political complexities.”
“Our banks have diminished exposure to the sovereign debt of Portugal Ireland and Greece, they have quite modest exposure to the sovereign debt of Italy and Spain. They have much more substantial exposure to the banking systems of Italy, Spain, France, and of course, very substantial exposures to the economies, more broadly speaking.”
“It (Operation Twist) is going to be par to par, which means the market values are not going to exactly match. It is possible that the value of the securities holdings may change, but it will be very small, and not significant in terms of stimulative effect.”
“We never take anything off the table because we don’t know where the economy is going to go. We can’t forecast what might happen in the future. We have no immediate plans to do anything like that (QE3).”
“The impact of energy and food prices, which rose for a large number of reasons early in the year, is now receding and inflation expectations in the financial markets, from forecasters, from the public are quite low and quite stable. I don’t expect inflation to be a problem going forward.
“As far as exiting our policies — we laid out in June an exit strategy ... and we have all the tools we need to reverse our policies at any time. ... When the time comes, we will certainly do what is necessary to maintain price stability. And right now, frankly, we are much further away from full employment than we are from price stability.”
“We do have tools, but obviously we want to evaluate the costs and the benefits of any decision we take and we want to make sure the economy is getting the appropriate amount of stimulus from us. ...The printing press — I think that’s a rather unfair characterization — the printing press literally is not actually involved.”
“Very generally, I think people are quite unhappy with the state of the economy. ... They blame, with some justification, the problems of the financial sector for getting us into this mess and they’re dissatisfied with the policy response here in Washington. At some level, I can’t blame them. Certainly, 9 percent unemployment and very slow growth — it’s not a very good situation. ...I’m not taking the protests into account specifically, but I certainly, like everyone else, am dissatisfied with what the economy is doing right now.”