Chairman Bernanke’s Testimony
Here are my notes from Chairman Bernanke’s written testimony before the Senate Banking Committee. In addition, if you want a great summary of what’s going on in the economy, pull the written semiannual Monetary Policy Report to the Congress (here’s the link) and flip through the charts that are included in the text.
Chairman Bernanke’s written testimony was broken into three parts and I’ve also included my thought for the day.
PART 1: The Economic Outlook
1. Economic recovery and growth are decelerating. Second half (2011) GDP growth was 2.5%, Q1 (2012) was 2% and we were probably lower in Q2.
2. Labor market improvement also decelerating. In Q4 (2011) and Q1 (2012), we were producing 200K jobs per month. In Q2, it was 75K. Yes, there are issues with seasonal adjustment and unusually warm weather. But, there is also a loss of momentum.
3. Household spending has advanced, but the growth rate is decelerating. There are concerns about employment, income prospects and overall confidence.
4. Housing is increasing modestly. Low mortgage rates have helped. Some price measures have turned up. But, potential buyers are worried about their finances or can’t get a mortgage (tighter standards, impaired credit, underwater mortgage). Supply continues to be large due to foreclosed homes.
5. Manufacturing production has slowed.
6. Business spending on equipment and software has decelerated from its double digit pace of the second half of 2011. Surveys suggest weakness ahead. Exports are getting weak because of Europe and other trading partners.
7. FOMC now predicts 1.9% – 2.4% growth for 2012 and 2.2% – 2.8% for 2013. This is lower than the predictions made in January. Financial strains from Europe have increased. US also has tight borrowing conditions for some businesses and households. Fiscal policy and uncertainty is a problem. In addition, we’re not getting the housing recovery that typically helps.
8. Growth will not be much above what is needed to absorb new entrants to labor force. So, unemployment will be at 7% or higher at end of 2014.
9. PCE price index rose at 3.5% annual rate in Q1 (due to energy prices). But, these prices dropped and the annualized rate was only 1.5% over first five months. (In 2011, it was 2.5%.)
PART 2: Risks to the Outlook
1. FOMC participants saw more uncertainty in their June forecasts than normal and believe that the risks to growth have increased.
2. Two main sources of risk: the euro-area fiscal and banking crisis; and the US fiscal situation. (Just two tiny sources of risk…Europe and the US.)
3. Hope for the best and prepare for the worst! After recapping the EU situation, Bernanke said that the Fed has been focusing on improving the resilience of our financial system to severe shocks. He said that the capital and liquidity positions of US banking institutions have improved substantially in recent years. (My capital and liquidity would also improve if you loaned me money at 0% interest for several years.) “European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy.”
4. “U.S. fiscal policies are on an unsustainable path and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery.”
5. The recovery could be endangered by the fiscal cliff. The CBO predicts a shallow recovery, but they ignored the additional negative effects likely to result from public uncertainty about how these matters will be resolved. (Those are Bernanke’s comments, not mine.)
6. “The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”
PART 3: Monetary Policy
1. Weak growth and subdued inflation means that easy monetary policy can continue.
2. Operation Twist will continue, but we call it “maturity extension program”. (Sounds fancy.)
3. The benefits of Operation Twist (oops, I mean “MEP”) are (A) lower interest rates; (B) no growth in the Fed’s balance sheet (because they’re selling short-term and buying longer-term); and (C) “induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative.”
4. The Fed “is prepared to take further actions as appropriate.” I’m not quite sure what that means, but I guess it’s his way of telling me to sleep easy.
PART 4: My Happy Thought For the Day
All the Fed can do is create accommodative monetary policy. They’ve done that. It’s great for the financial markets. But, the Fed can’t end our deficits, reduce our debt, curb healthcare costs, solve our unfunded liabilities problem, discourage Americans from claiming disability insurance or create jobs for citizens who don’t have enough education to compete in today’s society. Some of this is up to Congress and the rest of it is up to individuals. And when I say “Congress,” I’m talking about the group where half the members refuse to raise taxes and the other half refuse to cut spending. I’m talking about the group that has put us into this situation. It’s hard to be optimistic that they’re going to change.
Have a great week.
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