Bernanke getting in the zone ahead of the Q&A session - Image credit: AFP/Getty Images via @daylife
The heat rose on Capitol Hill Thursday as Fed chief Ben Bernanke got grilled by policymakers, minutes after delivering bland prepared remarks. The Chairman rejected the notion that artificially low rates, set by the Fed, gave the U.S. a false sense security, allowing Congress to procrastinate. Bernanke also joked that “a trillion there, a trillion here” from the Fed wouldn’t solve the budget deficit, but that it was Congress’ job to figure it out.
“Monetary policy is no panacea” said Bernanke, repeating himself to Congress once again. The Fed Chairman had previously explained that quantitative easing remained on the table, but gave no hints as to what the Fed’s coming actions would be.
It was the “fiscal cliff” debate,that took the day, though. After begging policymakers to avoid unnecessarily impeding the economic recovery” by “preventing a sudden and severe contraction in fiscal policy,” the Fed chief went on to say that Congress should man up and take the reins.
Bernanke said he’d be “much more confident” in the economic recovery if Congress took some of the policy “burden” off the Fed’s back. Sparking the ire of Congressman Kevin Brady, Bernanke denied the accusation that Fed-sparked record low rates were making the U.S. complacent about its massive debt and deficit problem.
The political lines were clearly drawn at the Joint Economic Committee’s hearing on Thursday. Republicans had Bernanke in their sights, blaming him for doing too much and even considering a third round of QE. The Fed Chairman rejected those accusations, despite acknowledging that he “recognize[d] that rates are quite low,” before adding “we do have the tools that will allows to provide further accommodation.” In other words, don't worry about how low rates are, we can push them down even further if the economy doesn't pick up.
A defiant Bernanke told the panel that “the reason to keep rates low isn’t to accommodate Congressional fiscal policy,” rather it was meant to stimulate the economy, via wealth effects for consumers, lowering spreads, and cheapening mortgages, among other things. At one point, he questioned the assertion that low rates had helped the deficit build up, noting that the budget deficit was so large that irrespective of the level of rates (this is when he made his “a trillion there, a trillion here” statement), Congress had the incentive to fix the problem before it got worse.
The Chairman was also asked about too big to fail. Major financial institutions like JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo hold about $9 trillion in assets, or two-thirds of GDP, according to Senator Bernie Sanders, posing major risks to the financial sector. Bernanke agreed that he would like to end TBTF in Wall Street by eliminating the advantages of being so large, but also acknowledged difficulties in deterring what the right size of a bank should be.
Global markets were expecting more from the Chairman. After the Chinese government cut interest rates earlier on Thursday, investors were looking to Bernanke for further monetary juice. But the Chairman didn’t give it to them, just told them all options are on the table. It was more a political than an economic day for Bernanke.
Both the S&P 500 and the Nasdaq gave up most of their gains initially, with the latter even falling into negative territory, before bouncing up. The S&P 500 was up 0.5% to 1,321 by 11:58 AM in New York, while the Nasdaq stood at 2,851 points, up 0.2%. The Dow held up surprisingly well, and was trading up 0.7% to 12,497. Treasuries were yielding 1.65% over ten years, while gold fell 1.6% to $1,607 an ounce.
