Today, the House Budget Committee held a hearing entitled "Challenges Facing the Economy: The View of the Federal Reserve." Federal Reserve Chairman Ben S. Bernanke was the sole witness testifying before the Committee and was asked to address, according to Committee Chairman Spratt (D-SC), "the recession plaguing our economy and on the prospects of recovery."
As part of his prepared testimony, Chairman Bernanke stated that recent data "suggest that the pace of economic contraction may be slowing," as indicated by "flat consumer spending" (in contrast to a sharp drop in the second half of 2008), "stable" sales of existing homes, and improved "consumer sentiment." The Federal Reserve "continue[s] to expect overall economic activity to bottom out, and then to turn up later this year." With respect to conditions in the financial markets, he observed that short-term funding markets have "improved recently," as indicated by a moderation of "risk spreads in those markets," "more lending is taking place at longer maturities," and the "issuance of asset-backed securities (ABS) backed by credit card, auto, and student loans has also picked up," supported by the availability of the Federal Reserve’s Term Asset-Backed Securities Loan Facility. In markets for long-term credit, "spreads between Treasury yields and rates paid by corporate borrowers have narrowed some, though they remain wide," and "yields on longer-term Treasury securities and fixed-rate mortgages have risen," primarily due to "concerns about large federal deficits" but also "greater optimism about the economic outlook."
During questioning, and in response to reports that German Chancellor Angela Merkel voiced skepticism about major central banks' approaches to tackling the economic crisis, Chairman Bernanke stated that he "respectfully disagrees" with Merkel's comments and that "strong fiscal action" by the Federal Reserve was necessary to avoid further catastrophic events. For example, he stated that while it was "with great reluctance" that the Federal Reserve bailed out American International Group, it was critical to avoid a system collapse. Moreover, Congress needs to actively consider the implementation of a "resolution regime" in which the Federal Reserve would "have a substantial role" to step in when major firm is or is facing trouble (as distinguished perhaps from the roles suggested by, among others, FDIC Chairman Sheila Bair). This would "remove the Fed" from making such decisions or having to act pursuant to its "lender of last resort" authority in the future. To avoid financial crises occurring in the future, Chairmen Bernanke reiterated his recommendation for "stronger oversight of [financial] firms", a "strength[ing] of financial infrastructure", additional capital requirements, and overall a "more collaborative" and "macro-prudential" approach to the entire system, rather than focusing on specific risks in individual sectors.