Bernanke Testimony to Congress: The World According to the Federal Reserve

The U.S. Federal Reserve Chairman Ben Bernanke testimony to Congress ended ahead of schedule today (Thursday) in the Senate, reiterating the same tame message he communicated to the House yesterday: The Fed thinks the economy will grow modestly.

"We don't see at this point that the very severe recession has permanently affected the growth potential of the U.S. economy," Bernanke told the Senate Banking Committee in his twice annual economic testimony to Congress.

Here's a look at what Team Bernanke does see in the economy:

Bernanke Testimony to Congress

No Additional Stimulus

Bernanke said elevated unemployment and subdued inflationary pressures support low interest rates into 2014, but did not give a hint of any additional stimulus measures.

Bernanke also defended previous stimulus measures, which have drawn criticism for not being worth their hefty price tags.

"If you look back at Quantitative Easing 2, so called, in November 2010, concerns at the time were that it would be a high inflationary environment, it would hurt the dollar, it would not have much effect on growth, etcetera," said Bernanke. "But since November 2010, we have had since then the QE2 and the so-called Operation Twist, we have had about 2-1/2 million jobs created, we have seen big gains in stock prices, we have seen big improvements in credit markets, the dollar is about flat, commodity prices excluding oil are not much changed, inflation is doing well in the sense that we are looking for about a 2 percent inflation rate this year."

High Gas Prices

Sen. David Vitter, R-LA, asked Bernanke if he thought the Fed's low interest rate policy encouraged commodity investing and pushed up oil and gas prices. Bernanke pointed to global events and increased demand as the real price drivers.

"We have seen a number of movements up and down in energy prices," said Bernanke. "To some extent a little bit of the movement in commodity prices is essentially inevitable because if the economy is growing and the world economy is growing, the demand for commodities goes up and that is going to create some tendency toward higher commodity prices. But when you have shocks to commodity prices arising from geopolitical events and the like, those are unambiguously negative, and they are bad for both households and for the broader economy."

The average price for U.S. gas has climbed more than 10% in just the past two months. This suggests a trajectory that could produce a spike of 60 cents a gallon or more by May. [Click here to read about how you can make money from high U.S. gas prices.]


Bernanke stressed that the high number of long-term unemployed is a concerning issue. He said the inability of many to find work is reducing our country's number of skilled workers, and increasing the chances those workers will permanently lose their skills.

"The job market is far from normal," Bernanke said. "Continued improvement ... is likely to require stronger growth in final demand and production."

The reported unemployment rate is 8.3%, but the real rate is much higher. The U.S. Labor Department last month stopped counting nearly 1.2 million people as part of the labor force.

More than 40% of America's unemployed - 5.5 million people - have been out of work for more than six months. The number of "marginally attached" - people who have searched for work in the past year but not the past month - is about 2.8 million, and the number of underemployed workers - "part-time for economic reasons," in government-speak - increased last month from 8.1 million to 8.2 million.

Government Spending

Bernanke urged Congress for a plan to reduce the government's long-term budget deficit.

"I would go for, at a minimum, I would aim for the next 10 to 15 years... for eliminating the so-called primary deficit, that is everything except interest payments, because once you eliminate the primary deficit so that current spending incurred and revenues are equal that means that the ratio of your debt to your GDP will stabilize," said Bernanke.

He also warned Congress to think of the effects of policy changes on the economy. He called the expiration of payroll tax cuts, the end of long-term unemployment benefits and cuts in federal spending as a "fiscal cliff" that threatens economic growth.

"The United States is on an unsustainable fiscal path looking out over the next couple of decades," Bernanke said. "If we continue along that path, eventually we will face a fiscal and financial crisis that will be very bad for growth and sustainability."

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