Fed Chairman Ben Bernanke testified today before the House Committee on the Budget on the economic outlook for 2012. Most of the meeting dealt with representatives trying to get Bernanke's opinions on fiscal policy issues. However, monetary policy was brought up a few times. There was one exchange between Rep. Diane Black (R-TN, 6th District) and Chairman Bernanke that I found most interesting. Rep. Black tried to understand how it can be helpful for the economy in an environment where savers have no incentive to save. Her question seemed to irritate Chairman Bernanke, and his reply was confusing.
I don't expect anything to come out of the exchange that will directly help savers, but it does show there are members in Congress who think the Fed has gone too extreme with the zero interest rate.
You can view the full 152 minutes of Bernanke's testimony at this C-Span video library page. The exchange between Rep. Black and Chairman Bernanke starts at time 2:17:00 into the video. I've transcribed the exchange below. The committee chair is Paul Ryan (R-WI, 1st District), and I included his statement that ended the exchange:
Black: On the other end, does a zero interest rate encourage savers to save?
Bernanke: It may, because there's both what economists call substitution effects and income effects, because you may need to save more to get the same return, but...
Black: I'm not sure that putting my money into accounts where I'm going to get a zero return is probably what I would want to do especially in an economy that's so uncertain.
Bernanke: Let's think this through. Suppose in order to solve savers problems, suppose the Fed raised interest rates sharply. That would almost certainly throw the economy back into recession. It would mean the stock market would decline. It would mean returns on other investments would go down. And it might mean increase deficits might lead to more concerns about our federal government. So, again, we understand the concern that savers have, but we are trying to deal with a bad situation, and this is one of the tools we have to try to get the economy back to full employment.
Black: I know my time is out, but I'm not advocating a sharp increase. I'm just saying that there's not an incentive right now if there's zero percent interest. Thank you.
Ryan: There's a case for normalizing policy.
Bernanke appeared to take Rep. Black's question as if she was advocating high interest rates. As Rep. Black said at the end of the exchange, she wasn't "advocating a sharp increase". Also as Rep. Ryan said, "there's a case for normalizing policy". The representatives weren't trying to debate the usefulness of low interest rates to help the economy. There's a big difference between low interest rates and never-ending zero interest rate.