Bernanke’s Q&A session with House panel

WASHINGTON (BestGrowthStock) – The following are highlights from a House Financial Services Committee hearing on Thursday with Federal Reserve Chairman Ben Bernanke testifying on the U.S. economy and Fed policy.

Bernanke’s prepared remarks were virtually identical to the testimony he gave to the Senate Banking Committee on Wednesday.

BERNANKE ON POSSIBILITY OF REDUCING INTEREST PAID ON RESERVES

“We are paying one-fourth of one percent so it’s obviously a very, very low rate of interest. The rationale for not going all the way to zero has been that we want the short-term money markets like the federal funds market to continue to function in a reasonable way because if rates go to zero there will be no incentive for buying and selling federal funds, overnight money in the banking system, and if that market shuts down … it’ll be more difficult to manage short-term interest rates, for the Federal Reserve to tighten policy sometime in the future. So there’s really a technical reason having to do with market function that motivated the 25 basis points interest on reserves.

That being said, it would have a bit of an effect on monetary policy … (and) we’d certainly consider that as one option.”

BERNANKE ON GOVERNMENT-SPONSORED AGENCIES:

“It’s very important to address this. The current situation is not sustainable obviously. Basically the two broad approaches would be to break up and privatize the companies, perhaps supported by a government-insured program. … The alternative would be to make them more like government utilities and have them just provide services under full government control. … Those are the two broad options.”

“We’re sort of half fowl, half horse at this point.”

“This is something we need to act on pretty soon.”

BERNANKE ON JOBS:

“Unemployment is the most important problem that we have right now … We’ve taken very strong steps.”

“What we can do is make financial conditions as supportive of growth as we can and we certainly are doing that.”

BERNANKE ON NO BASIS TO RADICALLY CHANGE OUTLOOK

“Although … some of the data have been a bit disappointing, we don’t so far have any basis to radically change our basic outlook.”

BERNANKE ON THE LABOR MARKET:

“I entirely agree with you that the labor market situation is unsatisfactory. That it’s incredibly important that we get the unemployment rate down and we get people back to work. It’s important not just for their sake and the future of our economy, because people when are out of work for a long time (they) lose skills and become less connected to the labor market.”

BERNANKE ON FURTHER POLICY ACTIONS

“We remain prepared to take further policy actions as needed to foster a full return to full utilization of our nation’s productive potential in the context of price stability. We are ready and we will act if the economy does not continue to improve, if we do not see the kind of improvements in the labor market that we are hoping for and expecting.

Now what can we do? We have certainly utilized our principal tools, our most obvious conventional tools anyway. And so we would have to step into new areas. I do believe that there are things that we could do and we are considering all options. Those include our communication — communicating to the public our intentions about future policy ease or future policy action perhaps in a context of some conditionality or framework that will help clarify our willingness to maintain policy support for the economy. We can lower the interest rate we pay on excess reserves, which is currently only a quarter of a percent but does have a bit of scope to be lowered. And we can do things to expand our balance sheet further, for example, to buy additional securities.

BERNANKE ON EFFECTIVENESS OF FURTHER EASING

“We are ready and will act if the economy does not continue to improve, if we don’t see the kind of improvements in the labor market that we are hoping for and expecting. The effectiveness of these actions would depend in part on financial conditions. If financial conditions become more stressed, as would happen presumably if the economy began to weaken, I think those steps would be more effective relatively speaking.”

BERNANKE ON SHORT- VS. LONG-TERM FISCAL POLICY

“In the short-term I would believe that we should maintain a reasonable degree of fiscal support, stimulus for the economy. In the longer term, I think we need to be taking steps to reassure the American people and the markets that our situation is going to be well-controlled. That means that if you extend the tax cuts you need to find other ways to offset them.”

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Bernanke’s Q&A session with House panel