Highlights of Bernanke's Testimony

Here are highlights of Fed Chairman Ben Bernanke's testimony before the House Budget Committee.

BERNANKE ON INFLATION EXPECTATIONS

"I think I would note that you look around for evidence of inflation, inflation expectations, you're not going to find very much.

Ben Bernanke

If you look, for example, at surveys of consumers, if you look at the forecasts of professional forecasters, if you look at the spreads between indexed and non-indexed bonds, all of those things are quite consistent with inflation remaining stable and well within the bounds that the Federal Reserve believes is consistent with price stability." "What we're seeing in the markets is that prices, manufacturing goods, for example, and wages in nominal terms are not showing any signs of a wage-price spiral.

To the contrary, they're showing quite a slow rate of growth....

As best as we can tell, within the uncertainties of the forecasting, we don't see any inflation risk in the near-term."

BERNANKE ON SLOW, GRADUAL RECOVERY:

"I recognize that many people have raised concerns about various aspects of policies, financial risks that have been incurred for example, and those are very real, serious concerns. But I do think we need to keep in front of us the fact that without the concerted effort of the Federal Reserve, the Treasury and other agencies like the FDIC, supported by the Congress and the administration, that last fall we very likely would have had a serious and perhaps a global financial meltdown with extraordinarily adverse implications for the U.S. and the global economies."

"We now are on a process of slow and gradual repair both in the financial system and the economy...and though again there are many issues that remain, we must keep in front of us the fact that we averted I think a very, very serious calamity."

BERNANKE ON INFLATION:

"I do think that when output gaps reach the level that we are currently seeing that it's no longer the case that we can really debate that the output gap exists. I think there clearly is an output gap and the experience is that, in previous recessions, that inflation has tended to fall after the recession. I think that's a reliable empirical regularity and the size of the current output gap will be a drag on inflation..."

"That being said, there are other factors as well, including the currency, including commodity prices, and so on, and we watch those very carefully.

I think I would note that if you look around you for evidence of inflation, inflation expectations, you're not going to find very much.

If you look, for example at surveys of consumers, if you look at the forecast of professional forecasters, if you look at the spreads between indexed and non-indexed bonds, all of those things are quite consistent with inflation remaining stable, and well within the bounds that the Federal Reserve believes is consistent with price stability."

REPUBLICAN REP. PAUL RYAN OF WISCONSIN ON FED POLICY:

"The Treasury is issuing record amounts of debt...Meanwhile, the Federal Reserve has injected an enormous amount of monetary stimulus into the economy, and has even started purchasing longer-term Treasury bonds in an attempt to lower borrowing costs and further ease financial conditions. This can be a dangerous policy mix."

"The Treasury is issuing debt and the central bank is buying it. It gives the alarming impression that the U.S. one day might begin to meet its financial obligations by simply printing money..."

"I am genuinely concerned that the Fed will be unable to unwind its considerable monetary policy stimulus in a timely manner to prevent a sharp rise in inflation over the medium term."

BERNANKE ON ECONOMY:

"We continue to expect overall economic activity to bottom out, and then turn up later this year."

"Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further."

BERNANKE OF LONGER-TERM TREASURY YIELDS:

"In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings."

BERNANKE ON INFLATION:

"In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation."

BERNANKE ON FISCAL STABILITY:

"Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs."

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

Here is the opening statement from Federal Reserve Chairman Ben Bernanke to the House Budget Committee:

"Let me now turn to fiscal matters. As you are well aware, in February of this year, the Congress passed the American Recovery and Reinvestment Act, or ARRA, a major fiscal package aimed at strengthening near-term economic activity.

The package included personal tax cuts and increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in federal purchases, and federal grants for state and local governments.

Predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face.

For example, households confronted with declining incomes and limited access to credit might be expected to spend most of their tax cuts; then again, heightened economic uncertainties and the desire to increase precautionary saving or pay down debt might reduce households' propensity to spend.

Likewise, it is difficult to judge how quickly funds dedicated to infrastructure needs and other longer-term projects will be spent and how large any follow-on effects will be.

The Congressional Budget Office (CBO) has constructed a range of estimates of the effects of the stimulus package on real GDP and employment that appropriately reflects these uncertainties. According to the CBO's estimates, between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3-1/2 million jobs.

The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income- support payments associated with the weak economy, will widen the federal budget deficit substantially this year.

The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011.

These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

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Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.

Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the

Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country's fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well controlled.

Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

Federal Reserve Transparency Let me close today with an update on the Federal Reserve's initiatives to enhance the transparency of our credit and liquidity programs. As I noted last month in my testimony before the Joint Economic Committee, I asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public.

That group has made significant progress, and we expect to begin publishing soon a monthly report on the Fed's balance sheet and lending programs that will summarize and discuss recent developments and provide considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged.

In addition, the reports will provide quarterly updates of key elements of the Federal Reserve's annual financial statements, including information regarding the System Open Market Account portfolio, our loan programs, and the special purpose vehicles that are consolidated on the balance sheet of the Federal Reserve Bank of New York. We hope that this information will be helpful to the Congress and others with an interest in the Federal Reserve's actions to address the financial crisis and the economic downturn. We will continue to look for opportunities to broaden the scope of the information and supporting analysis that we provide to the public."

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