Bernanke Handles Congressional Questioning. Offers Clear Explanations

Ben Bernanke, chairman of the Federal Reserve, testified for the first time in front of the now Republican-led House Budget Committee.  This committee is chaired by a known budget deficit hawk, Rep. Paul Ryan, the Congressman who delivered the Republican response to President Obama's State of the Union Address.

Ben's prepared remarks offered little new insight on the road ahead. In fact he basically just regurgiated his Feb.3 speech at the National Press Club, which was  titled "The Economic Outlook and Monetary Policy". Today's speech just added Fiscal Policy to the headline...The Economic Outlook and Monetary and Fiscal Policy

Here are a few quotes....

BERNANKE ON OVERALL U.S. INFLATION BEING LOW...
"There should be no doubt that we are unwaveringly committed to maintaining price stability....In terms of what we are looking at, first of all, overall inflation, including food and energy is still very low, about 1 percent. But looking forward, you ask about the yield curve. If you look, for example, at inflation break-evens which are a measure in the inflation-index bond market of what the market thinks inflation is going to be, the five-year break is about 2.1 percent, last time I looked. So there is not really any indication in our financial markets that in the United States there is an expectation of inflation. That being said, we look very seriously at output gaps, but also at commodity prices and all the other indicators that will help us assess when inflation is becoming a problem."

 BERNANKE ON INFLATION IN EMERGING MARKETS...
"The inflation is taking part in emerging markets because that's where the growth is, that's where the demand is and that's where in some cases the economies are overheating. It's the responsibility of the emerging markets to set their monetary and exchange rate policies in a way that will keep their economies on a stable path."

"The increases in oil prices, for example, are entirely due -- according to the International Energy Agency -- to increases in demand coming from emerging markets, they're not coming from the United States. So the bulk of the increase in commodity prices is  a global phenomenon. In the United States inflation made in the U.S is very, very low. Of course that's a serious problem but monetary policy can't do anything about, say, bad weather in Russia or increases in demand for oil in Brazil and China. What we can do is try to get stable prices and growth here in the United States."

BERNANKE ON CYCLICAL VERSUS STRUCTURAL UNEMPLOYMENT...
"I don't have a precise number, but we have done a lot of work looking at this. And I would say the bulk of it is still cyclical. The risk is that if it goes on long enough, it will start becoming structural as people loose their skills and their connection to the labor force."

BERNANKE ON GSE REFORM...
 "As you know, the Treasury is promising us a set of proposals very soon. It'll be interesting to see what they provide. There's various possibilities that we could do, including making them a government utility or privatizing them, which would be two alternatives. One suggestion which I have made in previous remarks is that if the government is involved in providing credit guarantees, they should do so only as a deep backstop -- that is, the first losses should be borne by the originators of the mortgages or by the securitizers. The government, if it does provide backstop insurance, should do so for an actuarially fair fee, premium, and that would essentially allow the government to provide  backstop in situations like we had in the last few years where the housing market comes under enormous stress."
 
BERNANKE ON ACTING NOW TO REDUCE BUDGET DEFICIT...
"Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation. Although these proposals differ on many details, they demonstrate that realistic solutions to our fiscal problems do exist."

Plain and Simple: The fun part was the Q&A session that followed Ben's speech, or so we thought. Little fireworks were seen. Ben handled the Congressional  “finger in the eye” quite well. He was soft spoken but firm when offering elementary explanations of the Fed’s outlook and their policy motivations.  He repeatedly addressed rising food and energy prices as a factor of rising demand from emerging economies, NOT MONETARY POLICY here in the United States. He again acknowledged improving economic and financial market conditions but was sure to point out the Fed’s role in that positive progress. He also shared the same sobering message on the health of the labor market. The current pace of economic expansion is not fast enough to reduce the unemployment rate to a level consistent with sustainable growth.  He was straight forward on the importance of Congress approaching the budget deficit from a long term perspective instead of trying to fix it all at once. He reminded of the mismatch between the labor skills supplied by our work and the labor skills demanded by employers, referencing education as the most influential solution to this problem.  He agrees with President Obama’s view that our tax code is too confusing and needs to be simplified to help speed along the macroeconomic recovery.  

 We recommend reading our coverage of Bernanke's speech at the National Press Club on February 3rd. We included several links and comments that provide a much deeper analysis economic fundamentals......Bernanke: Recovery Progressing. Labor Market Lags. Budget Deficit a Risk