Fed Chair Ben Bernanke faced a grilling from Congressional lawmakers in the House Budget Committee about the costs and benefits of the Quantitative Easing (printing money) program as well as pressure to get Bernanke to support their respective solutions for reducing the government’s massive budget deficits. Republicans generally promoted spending cuts as the way to reduce deficits; while Democrats pushed for tax increases during testimony.
Bernanke had some tap dancing to do in an attempt to explain away the belief that QE will lead to higher interest rates. Already investors, contemplating the Federal Reserve’s ultimate sale of the very long term bonds that the Fed is presently buying, are taking the opportunity to heavily sell long term bonds, driving up long term treasury rates up by 1.25% —
since early November. Mounting criticism of the program is coming from both outside and within the Federal Reserve System as a result of concerns that increasing rates may choke off economic recovery and prevent any improvement in the housing market.
The criticism continued on Capitol Hill last week.
Wisconsin Congressman Budget Committee Chairman Paul Ryan, concerned about the printing of new money, inflation and the falling dollar chastised Bernanke,
“There is nothing more insidious that a country can do to its citizens than debase its currency,” Ryan told Bernanke. “Chairman Bernanke: We know you know this. We know that you’re focused and concerned about this. The Fed’s exit strategy and future policy – it will determine how this ends.”
Ryan said he believed a “course correction here in Washington is sorely needed.”
“Endless borrowing is not a strategy,” he said. “My concern is that the costs of the Fed’s current monetary policy – the money creation and massive balance sheet expansion – will come to outweigh the perceived short-term benefits.” (Here)
Bernanke in his opening statement, defended the purchase over the last two years of almost $1.7 trillion in U.S. debt as having kept interest rates low and as having injected liquidity into the markets and the economy to sustain bank lending and consumer spending.
“By easing conditions in credit and financial markets, these actions encourage spending by households and businesses,” Bernanke said. “A wide range of market indicators suggest that the Federal Reserve’s securities purchases have been effective at easing financial conditions, lending credence to the view that these actions are providing significant support to job creation and economic growth.” (Here)
He went on to state that the program had saved as many as 3 million jobs and that QE2 wasn’t intended to be “a permanent increase in the money supply,” calling it a “temporary measure that will be reversed.” (here) As he said this he acknowledged that QE2 is only half done! During the hearing Bernanke acknowledged that QE2 is about half done with purchases of $300 Billion of an ultimate total of $600 Billion in bonds.
As in the past, during the hearing Bernanke didn’t endorse a specific legislative approach for cutting the deficits despite prompting by many legislators. He warned that persistent budget deficits will prompt investors to demand higher yields on government debt, causing interest rates to soar. He went on to say that higher interest rates would slow consumer and businesses spending, threatening the nascent slowing recovery. (Here)
Indeed, the market has already been responding to the conundrum with the sell off which has increased interest rates 1.25% since November.
Indeed, the market has already been responding to the conundrum with the sell off which has increased interest rates 1.25% since November.
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