Bernanke's testimony before the House Budget Committee

Fed Chairman Bernanke testified on “Economic and financial conditions and the federal budget” before the House Budget Committee this morning. Below are some key quotes:

On the economy

“The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year. Moreover, the economy … appears to be on track to continue to expand through this year and next.”

“This pace of growth … would probably be associated with only a slow reduction in the unemployment rate over time.”

“Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions.”

"In the business sector, real outlays for equipment and software posted another solid gain in the first quarter, and the increases were more broadly based than in late 2009; the available indicators point to continued strength in the second quarter.”

“significant restraints on the pace of the recovery remain … underlying housing activity appears to have firmed only a little since mid-2009 … Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions … pressures on state and local budgets, though tempered somewhat by ongoing federal support, have led these governments to make further cuts in employment and construction spending.”

“the labor market was hit particularly hard by the recession, but we have begun to see some modest improvement recently in employment, hours of work, and labor income.”

“In all likelihood, however, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009.”

On inflation

“inflation is likely to remain subdued.”

“To date, long-run inflation expectations have been stable, with most survey-based measures remaining within the narrow ranges that have prevailed for the past few years. Measures based on nominal and indexed Treasury yields have decreased somewhat of late, but at least part of these declines reflect market responses to changes in the financial situation in Europe.”

On Europe

“To help ease strains in U.S. dollar funding markets, the Federal Reserve has reestablished temporary U.S. dollar liquidity swap lines with the ECB and other major central banks. To date, drawings under these swap lines remain quite limited and far below their peaks reached at the height of the financial crisis in late 2008, but they are nevertheless providing an important backstop for the functioning of dollar funding markets.”

“The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities. The Federal Reserve will remain highly attentive to developments abroad and to their potential effects on the U.S. economy.”

On fiscal issues

“Ongoing developments in Europe point to the importance of maintaining sound government finances.”

“history makes clear that failure to achieve fiscal sustainability will, over time, sap the nation's economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.”

“Our nation's fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession.”

“in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.”


Fed Chairman Bernanke remained cautiously optimistic on the economic outlook, citing a gradual improvement in employment and more robust gains in business equipment investment. However, although Bernanke believes the economy will grow at a moderate pace this year and next, he noted that this will result in only a “slow reduction” in the unemployment rate and that it will take “a significant amount of time” to restore the jobs lost in 2008 and 2009. Given the Fed’s focus on labor market slack, this suggests to us that the FOMC remains comfortable with an “extended period” of highly accommodative monetary policy and the June Fed statement will likely retain this language. On Europe, the Fed Chairman stated that the debt crisis should have only a modest impact on U.S. growth, European policymakers have shown a commitment to address the problems, and the reestablishment of the Fed swap lines provides an important backstop for dollar funding markets (though drawings on these swap lines have been limited thus far). Highlighting the crisis in Europe, Bernanke repeated his warnings on the unsustainability of U.S. fiscal trends.

Source RDQ


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