Yesterday Ben Bernanke gave his testimony before the Committee on Financial Services as part of the Semiannual Monetary Policy Report to the Congress.
His prepared testimony didn’t seem to contain content significantly different from that he has previously stated.
However, in my opinion, his prepared testimony does serve as a convenient collection of various of his current thoughts and analyses.
While I don’t agree with various of the following excerpts, I do find them notable:
(note – these excerpts are in the order they appear in the prepared testimony)
In part, the recent weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary.
In light of these developments, the most recent projections by members of the Federal Reserve Board and presidents of the Federal Reserve Banks, prepared in conjunction with the Federal Open Market Committee (FOMC) meeting in late June, reflected their assessment that the pace of the economic recovery will pick up in coming quarters. Specifically, participants’ projections for the increase in real GDP have a central tendency of 2.7 to 2.9 percent for 2011, inclusive of the weak first half, and 3.3 to 3.7 percent in 2012–projections that, if realized, would constitute a notably better performance than we have seen so far this year.1
Long-term unemployment imposes severe economic hardships on the unemployed and their families, and, by leading to an erosion of skills of those without work, it both impairs their lifetime employment prospects and reduces the productive potential of our economy as a whole.
… many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes, the substantial backlog of vacant properties for sale, and the high proportion of distressed sales are keeping downward pressure on house prices.
The Federal Reserve’s acquisition of longer-term Treasury securities boosted the prices of such securities and caused longer-term Treasury yields to be lower than they would have been otherwise. In addition, by removing substantial quantities of longer-term Treasury securities from the market, the Fed’s purchases induced private investors to acquire other assets that serve as substitutes for Treasury securities in the financial marketplace, such as corporate bonds and mortgage-backed securities. By this means, the Fed’s asset purchase program–like more conventional monetary policy–has served to reduce the yields and increase the prices of those other assets as well. The net result of these actions is lower borrowing costs and easier financial conditions throughout the economy.2 We know from many decades of experience with monetary policy that, when the economy is operating below its potential, easier financial conditions tend to promote more rapid economic growth. Estimates based on a number of recent studies as well as Federal Reserve analyses suggest that, all else being equal, the second round of asset purchases probably lowered longer-term interest rates approximately 10 to 30 basis points.3 Our analysis further indicates that a reduction in longer-term interest rates of this magnitude would be roughly equivalent in terms of its effect on the economy to a 40 to 120 basis point reduction in the federal funds rate.
When we began this program, we certainly did not expect it to be a panacea for the country’s economic problems. However, as the expansion weakened last summer, developments with respect to both components of our dual mandate implied that additional monetary accommodation was needed. In that context, we believed that the program would both help reduce the risk of deflation that had emerged and provide a needed boost to faltering economic activity and job creation. The experience to date with the round of securities purchases that just ended suggests that the program had the intended effects of reducing the risk of deflation and shoring up economic activity. In the months following the August announcement of our policy of reinvesting maturing and redeemed securities and our signal that we were considering more purchases, inflation compensation as measured in the market for inflation-indexed securities rose from low to more normal levels, suggesting that the perceived risks of deflation had receded markedly. This was a significant achievement, as we know from the Japanese experience that protracted deflation can be quite costly in terms of weaker economic growth.
Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation. However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.
On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.
The full Monetary Policy Report to the Congress (pdf) contains a variety of commentary and analyses as well as detailed economic forecasts.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1317.72 as this post is written