Bernanke testifies on economy and Fed actions
Bernanke testifies on economy and Fed actions
Bernanke testifies on economy and Fed actions
Fed Chairman Ben Bernanke was once again before the Joint Economic Committee of Congress to testify on the economic outlook. While his speech was titled “The economic outlook,” his remarks encompassed more than just the economy, but also recent Fed actions and the conditions in financial markets.
Here are some of the notable passages from Bernanke’s prepared remarks:
“However, beginning in mid-February, worsening liquidity conditions and reports of losses at the GSEs, Fannie Mae and Freddie Mac, caused the spread of agency MBS yields over the yields on comparable Treasury securities to rise sharply. Together with the increased fees imposed by the GSEs, the rise in this spread resulted in higher interest rates on conforming mortgages. More recently, agency MBS spreads and conforming mortgage rates have retraced part of this increase, and conforming mortgages continue to be readily available to households. However, for the most part, the nonconforming segment of the mortgage market continues to function poorly.”
“Concerns about employment and income prospects, together with declining home values and tighter credit conditions, have caused consumer spending to decelerate considerably from the solid pace seen during the first three quarters of last year. I expect the tax rebates associated with the fiscal stimulus package recently passed by the Congress to provide some support to consumer spending in coming quarters.”
“Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.”
“Inflation has also been a source of concern … To a large extent, this pickup in inflation has been the result of sharp increases in the prices of crude oil, agricultural products, and other globally traded commodities.”
“We expect inflation to moderate in coming quarters. That expectation is based, in part, on futures markets’ indications of a leveling out of prices for oil and other commodities, and it is consistent with our projection that global growth — and thus the demand for commodities–will slow somewhat during this period. And, as I noted, we project an easing of pressures on resource utilization. However, some indicators of inflation expectations have risen, and, overall, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully in the months ahead.”
“Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company’s failure could also have cast doubt on the financial positions of some of Bear Stearns’ thousands of counterparties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability.”
“Clearly, the U.S. economy is going through a very difficult period … Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year. I remain confident in our economy’s long-term prospects.”
Following his prepared remarks, Bernanke faced direct questioning from members of the committee, and was particularly grilled by a couple of grandstanding politicians — Ron “Windbag” Paul and Ted “Chappaquiddick” Kennedy. But from that song and dance routine did come a few notable remarks from the bearded professor himself, Fed Chairman Bernanke.
When asked if we were in a recession, Bernanke said the Fed’s best estimates are that the economy is growing very slowly, but “there is a chance of slight contraction” and a “recession is possible.”
There was, as to be expected, a tremendous amount of focus on the Fed’s intervention in the Bear Stearns situation. Below are several of the points Bernanke made, including some direct quotes.
Bernanke said that just days prior to Bear’s downfall, the Securities and Exchange Commission saw Bear Stearns as having adequate capital, but Bernanke noted their problem was “more of liquidity” after other lenders became unwilling to lend further to Bear.
In regard to the Fed’s role in Bear Stearns, Bernanke was clear, “We did not bail out Bear Stearns.” In taking this step, Bernanke acknowledged thinking long and hard about it but the question he kept coming back to was “What was best for the American public?” He pointed out the Fed lent $29 billion against $30 billion of investment grade, current and performing collateral. He said the Fed “acted in its sphere of influence” with regard to Bear Stearns and Congress must act in its sphere of influence with regard to housing, and recommended Congressional attention to government sponsored enterprise, or GSE, reform.
One final point that highlights the largest consumer impact of the Fed’s repeated interest rate cuts, Bernanke stated that “interest rate cuts have substantially reduced the interest rate reset problem.”
Although there is plenty of handicapping taking place surrounding the next Fed meeting at the end of the month, it remains too close to call. The Fed’s course can change on a dime if unexpected events in financial markets arise, as we saw in the days preceding their March meeting. For now, my best guess is that the next FOMC meeting will be much like a ballplayer with a sore hamstring, a game-time decision.”