WASHINGTON (MNI) – The following is the second and final section of
the complete text of the remarks of Federal Reserve Chairman Ben
Bernanke prepared Tuesday for the Senate Banking Committee:

The second important risk to our recovery, as I mentioned, is the
domestic fiscal situation. As is well known, U.S. fiscal policies are on
an unsustainable path, and the development of a credible medium-term
plan for controlling deficits should be a high priority. At the same
time, fiscal decisions should take into account the fragility of the
recovery. That recovery could be endangered by the confluence of tax
increases and spending reductions that will take effect early next year
if no legislative action is taken. The Congressional Budget Office has
estimated that, if the full range of tax increases and spending cuts
were allowed to take effect–a scenario widely referred to as the fiscal
cliff–a shallow recession would occur early next year and about 1-1/4
million fewer jobs would be created in 2013.3 These estimates do not
incorporate the additional negative effects likely to result from public
uncertainty about how these matters will be resolved. As you recall,
market volatility spiked and confidence fell last summer, in part as a
result of the protracted debate about the necessary increase in the debt
ceiling. Similar effects could ensue as the debt ceiling and other
difficult fiscal issues come into clearer view toward the end of this
year.

(3 Congressional Budget Office (2012), Economic Effects of Reducing
the Fiscal Restraint That Is Scheduled to Occur in 2013 (Washington:
CBO, May), available at www.cbo.gov/publication/43262. The effect of the
fiscal cliff on real GDP is shown in table 2 (p. 6). The effect of the
fiscal cliff on employment, relative to a less restrictive alternative
fiscal scenario that assumes that most expiring tax provisions are
extended and that the spending sequestration does not take effect, is
shown in table 3 (p.7).

The most effective way that the Congress could help to support the
economy right now would be to work to address the nations fiscal
challenges in a way that takes into account both the need for long-run
sustainability and the fragility of the recovery. Doing so earlier
rather than later would help reduce uncertainty and boost household and
business confidence.

Monetary Policy

In view of the weaker economic outlook, subdued projected path for
inflation, and significant downside risks to economic growth, the FOMC
decided to ease monetary policy at its June meeting by continuing its
maturity extension program (or MEP) through the end of this year. The
MEP combines sales of short-term Treasury securities with an equivalent
amount of purchases of longer-term Treasury securities. As a result, it
decreases the supply of longer-term Treasury securities available to the
public, putting upward pressure on the prices of those securities and
downward pressure on their yields, without affecting the overall size of
the Federal Reserves balance sheet. By removing additional longer-term
Treasury securities from the market, the Feds asset purchases also
induce private investors to acquire other longer-term assets, such as
corporate bonds and mortgage backed-securities, helping to raise their
prices and lower their yields and thereby making broader financial
conditions more accommodative.

Economic growth is also being supported by the exceptionally low
level of the target range for the federal funds rate of 0 to 1/4 percent
and the Committees forward guidance regarding the anticipated path of
the funds rate. As I reported in my February testimony, the FOMC
extended its forward guidance at its January meeting, noting that it
expects that economic conditions–including low rates of resource
utilization and a subdued outlook for inflation over the medium run–are
likely to warrant exceptionally low levels for the federal funds rate at
least through late 2014. The Committee has maintained this conditional
forward guidance at its subsequent meetings. Reflecting its concerns
about the slow pace of progress in reducing unemployment and the
downside risks to the economic outlook, the Committee made clear at its
June meeting that it is prepared to take further action as appropriate
to promote a stronger economic recovery and sustained improvement in
labor market conditions in a context of price stability. Thank you. I
would be pleased to take your questions.

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** MNI Washington Bureau: 202-371-2121 **

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