AT TODAY’S HOUSE BUDGET COMMITTEE HEARING, members heard testimony on the state of the U.S. economy and the pace of recovery in the wake of the 2008 financial crisis.
Although economic data has been positive as of late, the Federal Reserve has remained cautious with its optimism. The policy-setting arm of the central bank announced earlier this month that it plans to keep interest rates low until the end of 2014, 18 months longer than previously prescribed. It also trimmed its economic expectations for the upcoming year, citing the EU debt crisis and continued struggles in the housing market as the primary threats to growth.
In his opening remarks, Chairman Paul Ryan (R-Wis.) expressed frustration that the U.S. economy has been “mired in a slow-growth, high-unemployment trap” for the last three years. He said the President’s policies have failed to boost the recovery, while adding “hundreds of billions” to the national deficit, creating uncertainty about the fiscal and economic future. He also criticized the Fed on its recent announcement to hold interest rates at low levels until 2014 and their views on inflation, specifically their intent to allow inflation to rise above target levels to promote employment. In closing, Ryan said the nation needs a “course correction” to get back on the right track because nothing is more critical than restoring real job and business growth.
Ranking Member Chris Van Hollen (D-Md.) agreed with Ryan’s call for a course correction, but also said the economy has shown signs of improvement. He expressed concern that economic shocks could derail the recovery and urged the Fed to remain steadfast in its mission of price stability. Van Hollen also took exception to recent Republican calls to strip the Fed of its employment mandate, arguing that any assistance in getting Americans back to work is much needed.
In his opening statement, Ben Bernanke, Chairman of the Federal Reserve, said the economy has shown signs of improvement, but the pace of recovery has been “frustratingly slow,” leaving the economy vulnerable to shocks. He repeated the Federal Open Market Committee’s (FOMC) January 25 statement that the outlook for the economy would likely warrant near-zero interest rates through at least late 2014, and noted that the FOMC also established an inflation goal of 2 percent, which Bernanke said should reduce “public uncertainty” about monetary policy. Bernanke made it clear, however, that general uncertainty about the economy is subsiding and business confidence is increasing, which he said should position American firms to increase their capital spending and hire more employees.
In regards to the deficit, Bernanke implored members to put the nation on a path “economic and financial stability,” which he qualified as ensuring that debt relative to national income remains stable, or in decline. However, Bernanke cautioned Congress not to “unnecessarily impeded the current economic recovery,” with dramatic budget cuts. In closing, Bernanke said indicators of spending, production, and job-market activity have shown some signs of improvement, but the general outlook remains uncertain, and “close monitoring of economic developments will remain necessary.”
Question and Answer
The question-and-answer session largely focused on deficit reduction, with members on both sides of the aisle pointing fingers. In general, Bernanke responded to questions on the deficit by reiterating his call for Congress to “get its fiscal house in order,” and urging them to address the situation sooner rather than later. He also said the effects of not reducing the deficit might not be felt in five years or even 10, but the U.S. could face its own debt crisis if nothing is done in 15 to 20 years.
In response to several questions about pursuing more aggressive deficit-reduction strategies, Bernanke said more aggressive strategies are warranted over the longer term, but it needs to be done it a way that does not harm the recovery and “doesn’t do it all at once.”
“I think that as long as there’s a credible, strong plan over time … we’ll achieve most of the objectives of fiscal sustainability,” Bernanke said.
Ryan opened up the questioning by suggesting that Bernanke is eroding American’s savings and “bailing people out” by indirectly engaging in fiscal policy. Bernanke acknowledged that the flattening of the yield curve due to quantitative easing eroded savings and caused some hardship, but noted that a weak economy was even more dangerous. Ryan also accused Bernanke of “putting a cap on price discovery” and creating a false sense of security by keeping rates low. Bernanke retorted that if Treasury investors lose confidence, rates will go up and there will be nothing the Fed can do about it.
Rep. Lloyd Doggett (D-Texas) asked Bernanke if the Fed is having difficulty satisfying its dual mandate to direct monetary policy and foster full employment. Bernanke said the Fed is not satisfied with the current economic situation, but does not believe Congress needs to change its mandate.
Rep. Scott Garrett (R-N.J.) engaged Bernanke on the housing white paper the Fed released earlier in the month. Bernanke said the Fed issued the paper because it is keenly interested in the housing market and several Congressmen had asked the Fed to weigh in on the issue. Bernanke was quick to point out, however, that the white paper did not include any recommendations and was intended to provide a balanced assessment of existing conditions in the market and proposed reforms. Following up, Garrett asked Bernanke to comment on the Obama administration’s refinancing plan. Bernanke said the Fed has not fully analyzed the proposal, but noted that there are costs to the program, for the government and investors. Additionally, Bernanke said that refinancing has slowed considerably from the end of last year and at the very least, the Administration plan brings the issue back to the forefront.
Rep. John Campbell (R-Calif.) also wanted to discuss the housing market with Bernanke, specifically asking him to comment on the importance of a housing recovery to the health of the economy. Bernanke said the lack of sustained recovery in the housing market is a primary reason the recovery has been a disappointment so far, noting that a sustained housing recovery would be a significant boost to the economy. Bernanke also acknowledged that the Fed has an internal working group dedicated to the housing market, and they have been hard at work finding ways to spur a recovery and private investment.
Campbell, and several other members, asked if a solution to the EU debt crisis was closer or further away than the last time he was on the Hill. Bernanke said there have been some positive developments as of late, pointing to the European Central Bank’s (ECB) capital infusion to EU banking institutions, and said there has also been positive progress on a more permanent solution. Bernanke cautioned that there is still a lot of work to be done. He said the EU banking system remains undercapitalized and the new backstops in place to prevent the spread of contagion are not proven in “size or effectiveness.” Rep. Tom Price (R-Ga.) followed up on Campbell’s line of questioning by asking Bernanke how exposed the U.S. is to EU debt. Bernanke said the U.S. has about $10 billion of exposure to EU debt through its obligations to the International Monetary Fund (IMF) and has a swap agreement with the ECB, although under the terms of the agreement, the ECB is burdened with all of the risk.
Rep. Todd Young (R-Ind.) asked Bernanke if the Fed has started making preparations for the disorderly default of an EU country or financial institution. Bernanke said the Fed is working with banks to lessen their exposure to EU sovereign debt, but the Fed is limited in what it could do to protect the economy from a default of that magnitude. He did indicate that in the result of an unplanned default, the Fed would provide additional funds to programs under pressure, pursuant to its 13.3 duties under Dodd-Frank, and would keep the discount window open for banks that needed extra funds.
For testimony and a webcast of the hearing, please click here.
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