Ben Bernanke Testimony: We Have "Belts, Suspenders" to Unwind Balance Sheet

The two-day Ben Bernanke testimony before Congress continues today (Wednesday) as the U.S. Federal Reserve Chairman faces the House Financial Services Committee. Members will grill Bernanke for more information on the Fed's exit strategy from quantitative easing (QE) and its easy money policy.

While Bernanke did admit yesterday to the Senate Banking Committee that "there's no risk-free approach" to unwinding the $85 billion-a-month bond-buying program, he shed little light on how the QE measures would end.

In fact, Bernanke's vague answer to Sen. Richard Shelby, R-AL, when asked how the Fed will deleverage the balance sheet, was this: "In terms of exiting from our balance sheet... a couple of years ago we put out a plan; we have a set of tools. I think we have belts, suspenders - two pairs of suspenders. I think we have the technical means to unwind at the appropriate time; of course picking the exact moment to do, of course, is always difficult."

The buying is expected to continue until the Fed sees the unemployment rate fall to at least 6.5%, but Fed critics are concerned about the nearly $3 trillion balance sheet Bernanke has built up already.

Congress Presses for Fed Exit Strategy

The Bernanke testimony follows last week's news that Rep. Jim Jordan, R-OH, chairman of the House Oversight and Government Reform Committee, asked the Fed Chairman to release documents relating to balance sheet deleveraging.

The deadline for releasing the information is March 5.

"With these continued concerns about the size of the Federal Reserve's portfolio and the potentially devastating consequences from any unwind, Congress and the public must be fully informed about the Federal Reserve's expectations and actions," Jordan wrote last week.

Bernanke Testimony: No Inflation?

Another topic Senators pressed Bernanke about was inflation.

Bernanke said the central bank takes "very seriously" the excessive risk-taking its dovish policies could provoke and is watching markets carefully. Its QE measures, Bernanke continued, look to keep inflation below the Fed's tame 2% target for the near future.

In response to Sen. Bob Corker, R-TN, who called Bernanke the biggest dove since World War II, Bernanke said, "You called me a dove, well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period-or at least one of the best," Bernanke shot back.

The bank's accommodative monetary policy has "supported real growth in employment and kept inflation close to our target," the Fed Chief maintained.

"We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery. Inflation is currently subdued, and inflation expectations appear well advanced," said Bernanke.

What's an Investor to do?

For now, and for the foreseeable future, the Fed's easy money measures remain intact.

Bernanke's case for continued QE was welcomed by investors and precious metals traders. The Dow Jones Industrial Average gained 116 points, or 0.8%. Gold was up 1.3%, its biggest one-day gain in three months.

But inflation is on its way.

As Money Morning Global Investing Strategist Martin Hutchinson has explained, "Bernanke has created something of a new monetary ground, increasing the money supply rapidly without getting inflation. But it won't last," said Hutchinson. "At some point we'll get hyperinflation and probably a Treasury default."

His advice for investors?

"For investors the action to take is obvious: Buy gold. At some point fairly soon, you'll need it."

For more on Hutchinson's analysis of when inflation will affect the U.S. economy, read Why There's No Real Inflation (Yet).

The Ben Bernanke testimony continues today when he faces the House Financial Services Committee at 10 a.m.

Related Articles and News:

• Money Morning:
  What Every Investor Should Know About the End of QE
• Bloomberg News:
  Bernanke Defends Asset Buying as Benefits Outweigh Risks
• CNBC:
  Bernanke: My Inflation Record at the Fed Is One of the Best
• The New York Times:
  Fed Chairman Defends Stimulus Efforts