Yesterday, the House Committee on Financial Services held a hearing on monetary policy and the state of the economy during which Ben Bernanke gave his semiannual testimony on monetary policy.
Bernanke testified that concerted efforts by the Federal Reserve, the Treasury Department and other U.S. authorities together with “highly stimulative” monetary and fiscal policies have helped support a “nascent economic recovery,” but predicted that full recovery would be slow. Despite recent signs that job losses have slowed, the “job market remains quite weak.” Taking all factors into account, he predicted that "the federal funds rate is likely to remain exceptionally low for an extended period."
Bernanke also outlined two ways to improve transparency and accountability of the Federal Reserve. First, he said that the Federal Reserve would support legislation to disclose the names of companies that take advantage of special lending programs, so long as enough time has passed since the loan request to avoid stigmatizing the borrowing firm. Second, he said that the Federal Reserve would support audits by the Government Accountability Office of how the lending programs were conducted. In addition, he emphasized that the Federal Reserve is conducting an intensive self-examination of its regulatory and supervisory responsibilities and has actively been implementing improvements.
Bernanke also expressed qualified support for the so-called “Volcker rule,” which would generally prohibit deposit taking organizations from also engaging in proprietary trading. He told the Committee that such a rule “might be appropriate” as long as regulators retain the discretion to determine what constitutes trading activities that should be prohibited and those that should be permitted, with prudential limitations, such as bona fide hedging and market making, noting that care should be take to avoid prohibiting “good hedging which actually reduces risk” or “market-making which is good for liquidity.”
The questioning following Bernanke’s testimony focused on whether balancing the budget or more fiscal stimulus would better promote economic recovery. In response to questions by Chairman Barney Frank (D-MA), Bernanke affirmed that he believed that the American Recovery and Reinvestment Act of 2009 had created jobs. At the same time, in response to Representative Spencer Bachus (R-AL), he conceded that the long-term growth in the debt and deficit is not sustainable. A plan to bring the nation’s fiscal house in order, he said, would be “very helpful—even to the current recovery, to markets, to confidence.”