–Dollar ‘Pretty Stable’ Since QE2

By Brai Odion-Esene

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Wednesday
defended the central bank’s actions to support the recovery since it
slashed interest rates to zero, telling a Senate panel the Fed is
attempting to calibrate its policy to a setting that will support the
economy.

In day No. 2 of his monetary policy testimony on Capitol Hill,
Bernanke told the Senate Banking Committee that the continued problems
in the housing sector, combined with financial conditions that are
stressed by the crisis in Europe, has resulted in a slower economic
recovery than anticipated.

“Total demand in the economy is not adequate to fully utilize the
resources of the economy, and that is why we talk about the need for
greater consumer spending and greater investment,” he said.

The Fed’s monetary policy is aimed at its dual mandate, Bernanke
told the Committee. “We are trying to set monetary policy at a setting
that will help the economy recover in a context of price stability,” he
said.

He argued that the Fed’s efforts, on net, are raising household
wealth. “A stronger economy produces higher returns in equity markets,
real estate markets and the like,” he said.

Since November 2010, when the Fed has introduced a second round of
quantitative easing and its so-called ‘Operation Twist’ program,
Bernanke argued that 2.5 million jobs have been created and stock prices
have seen big gains.

“In November 2010 we had some concerns about deflation and I think
have sort of gotten rid of those and brought ourselves back to a more
stable inflation environment,” he said. “I think that … those actions
played a constructive role.”

As for the program’s impact on the U.S. dollar, Bernanke said the
greenback has been “pretty stable” since QE2 was introduced.

He called the uncertainty about the direction of the housing market
“troubling,” and said the weakness in the housing “is probably muting to
some extent” the impact of the Fed’s low interest rate policy.

So, “Growth is not as strong, and the improvement in the
unemployment rate is not as quick as obviously we would like,” Bernanke
said.

For the recovery to become strong and sustainable will require
declines in the unemployment rate and strong growth in demand and
production, he said.

Still, “We don’t see at this point that the very severe recession
has permanently affected the growth potential of the U.S. economy,” he
said.

Bernanke added that he remains concerned about the long-term
unemployed in the United States, warning if this continues it will
reduce the human capital “that is part of our growth process going
forward.”

Commodity prices also remain a risk, he continued, although
Bernanke argued that most of the volatility is inevitable, especially
when a growing world economy and the resulting demand drive up prices.

Oil is one commodity that has been “particularly troublesome,”
Bernanke said, with mostly supply fears contributing to price increases.

He said shocks due to geopolitical events “are unambiguously
negative and are bad for both households and for the broader economy.”

Pressed on the Fed’s plans to wind down its massive balance sheet
when the time comes, Bernanke repeated the steps the Fed has laid out in
the past on how it would proceed. These include allowing securities to
run-off in the short-term, and in the longer-term selling some of the
securities in the Fed’s portfolio.

“Eventually, at the appropriate time, our goal is to get back to a
more normal size balance sheet consisting only of Treasury securities,”
he said.

Bernanke was again asked to comment on Europe, and he assured the
Senate panel that the direct exposures of U.S. banks to European
sovereign debt “is quite limited and is well hedged.”

He went on to warn, however, that “if there is a major financial
problem in Europe, there’ll be so many different channels by which that
will affect the stability of our financial system that I wouldn’t want
to take too much comfort from that.”

The Fed chairman repeated his warning against Congress enacting
drastic spending cuts in one fell swoop, with the recovery not yet
complete and unemployment still high while the rate of growth is modest.

Still the U.S. is on an unsustainable fiscal path, Bernanke said,
and — if nothing is done — it will face a fiscal and financial crisis
“that will be very bad for growth and stability.”

Asked what in his opinion a credible fiscal plan should aim to
accomplish, Bernanke said the goal should be to eliminate the U.S.
primary deficit — leaving nothing but interest payments — within the
next 10 to 15 years.

Bernanke also sounded a note of warning about money market mutual
funds, saying they still face some risks.

“In particular they still could be subject to runs,” he said,
adding that because of the Dodd-Frank Act, the Fed’s ability to lend to
MMMFs is greatly restricted and the U.S. Treasury can no longer provide
ad hoc insurance.

** Market News International Washington Bureau: 202-371-2121 **

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