–Have Tools Available, Success To Depend On Financial Conditions

By Brai Odion-Esene

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Thursday
repeated the central bank’s committment to intervene if the U.S. economy
does not continue to improve or if the jobs picture fails to recover as
expected.

Taking questions in his second straight appearance on the Hill, for
his semiannual monetary policy report to the House Financial Services
Committee, Bernanke said it is very important to get the unemployed in
the U.S. back to work, calling the high unemployment rate
“unacceptable.”

The Fed chairman said the central bank has been very aggressive in
addressing the issue of unemployment: slashing interest rates close to
zero, committing to an accommodative policy for an extended period of
time, taking extraordinary actions to support the financial markets, and
purchasing $1.5 trillion of securities.

This has eased financial conditions “quite considerably,” he said,
and the Fed remains prepared to do more if necessary.

Repeating comments from his prepared testimony, Bernanke said, “We
remain prepared to take further policy actions as needed to foster a
return to full utilization of our nation’s productive potential in the
context of price stability.

“We are ready and we will act if the economy does not continue to
improve, if we don’t see the kind of improvements in the labor market
that we are hoping for an expecting.”

As he did in his testimony before the Senate Banking Committee
Wednesday, Bernanke ran through the options available to the Fed if it
turns out that more easing is required, using new tools like
communicating to the public the Fed’s intentions about future policy
actions, “perhaps in a context of some conditionality or framework that
will help clarify our willingness to maintain policy support for the
economy.”

It can also lower the interest rate paid on excess reserves —
“which does have a bit of scope to be lowered,” he said — or the Fed
could expand its balance sheet further.

The effectiveness of these actions would depend in part on
financial conditions, Bernanke said.

“If financial conditions become more stressed, as would happen
presumably if the economy began to weaken, I think those steps would be
more effective relatively speaking.”

As for ripples from the debt woes in Europe, Bernanke predicted
that as the effects from the financial crisis across the pond fade,
there will continue to be moderate growth in the U.S. economy.

The Fed has not seen any other eventuality that would cause it to
radically revise its basic outlook, he continued, with no “specific
threat” on the horizon that could stunt U.S. growth.

Asked for his thoughts on the debate being waged in U.S. political
circles about the benefits of maintaining the massive government support
for the economy or acting to trim the deficit, Bernanke said it is not
“feasible” nor would he recommend trying to rein in the deficit right
now.

“The economy is still quite weak,” he said, so it is important to
maintain the current levels of fiscal support.

The Fed is also doing its part keeping monetary policy
accommodative to make financial conditions supportive of growth and
encourage the private sector to invest and grow, he said.

The U.S. economy continues to require monetary policy support, he
said, but the government also needs to demonstrate its committment to
fiscal consolidation in the medium-term.

“In the medium- and longer-term we have an unsustainable fiscal
trajectory and we need to address that in order to maintain the
confidence of the public and the markets,” Bernanke said.

So his advice is to maintain stimulus measures in the short-term,
before acting to fix the fiscal situation in the long-term.

Any stimulative measure lawmakers implement now, he said, must be
well designed, using criteria such as how effective it is and will it
provide support for long-run growth.

One of the many criticisms aimed at the financial regulatory reform
bill has been the absence of any housing finance reform, particularly
with regards to mortgage giants Fannie Mae and Freddie Mac.

Invited by one member of the Committee for his thoughts, Bernanke
agreed that it is important to address the future of the
government-sponsored enterprises, as the current situation is not
sustainable.

There are broad approaches that the government could adopt, he told
lawmakers. Either break up and privatize the companies — supported by a
government insurance program for the mortgages, a service they would pay
for — or turn them into government utilities with no shareholders so
they can provide services under full control of the government.

“You need to go one direction or the other,” Bernanke insisted,
adding that the issue of housing finance reform needs to be taken on
“pretty soon.”

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

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