Last week I reviewed Fed Chairman Ben Bernanke's testimony before the House Committee on the Budget on the economic outlook for 2012. Yesterday, Bernanke gave a similar testimony in the Senate Budget Committee Hearing, and like last week, Bernanke was asked a few tough questions about zero interest rates.
I think it's important to know what members of Congress are asking Bernanke and what Bernanke is saying to them. First, it's nice to see that members of Congress are expressing similar concerns that we have. It probably won't change Bernanke's plans, but at least he's hearing the concerns. Second, it can guide us on an online petition that I discussed on January 26th. I will have more on the petition later this week.
This Washington Post article has a good review of Tuesday's Senate hearing. The main takeaway from the article is that it's going to take a lot more reduction in the unemployment rate before the Fed changes its commitment of ultra low rates until late 2014.
I reviewed the C-SPAN video of the Senate hearing. In the two hours of Chairman Bernanke's testimony, I found the following exchange between Senator Pat Toomey (R-PA) and Chairman Bernanke most relevant for savers. This exchange started at approximately 1:28:30 into the hearing. I transcribed this exchange below, and I highlighted the exchange that specifically talked about savers.
Senator Pat Toomey (R-PA):
It seems unlikely to me anyway that the Fed would pursue such a extremely accommodative monetary policy as it has been pursuing and is pursuing if it weren't for the employment mandate. I'm concerned about some of the unintended consequences of maintaining zero interest rates, negative real interest rates. And I wonder if you would comment on some of these.
When I think about some of the implications, we have savers being punished for this, at least twice, once by virtue of the fact that after sacrificing their whole lives to accumulate savings, they get no return, and then, the very real possibility that the value of those savings will be eroded.
Secondly, we're encouraging excessive risk taking.
Thirdly, it seems to me this drives a misallocation, certainly has the potential, to drive a misallocation of investment, and I would argue, the risk of creating bubbles. In fact, it's hard not to see the U.S. Treasury market as a bubble right now.
Lastly, doesn't this enable the excessive deficits that we're running here, in part because they're funded at artificially low interest rates?
So these are some of the concerns I have from this policy, and I wonder if you would just comment on them.
I don't know if I can cover all of them.
Let me first say that there are single mandate central banks like the Bank of England and the ECB, which have policies very similar to the Fed. Given that inflation is close to target, I don't think we would be doing radically different things if we had a single mandate at this particular point in time.
We're quite aware of these costs and risks. I've talked about them in speeches. It's one of the reasons we discuss the efficacy and risks associated with the policies as part of the overall discussion.
With respect to say savers, for example, it's true that low interest rates reduce the returns that savers get on their savings, but I would make the general point that savers just don't necessarily hold say Treasury bonds. They also hold corporate debt, stocks and a variety of other securities. And the returns of those securities depend very importantly on the strength of the economy. So we're trying to strengthen the economy. We're helping to improve the returns to savers.
To some extent on risk taking, to some extent, part of the reason for the policy is to move people away from very conservative liquid positions slightly more into riskier positions that involve investment and lending and so on that would help promote strength in the economy. We don't want to go too far, and we're very attentive to that, and we have greatly expanded our ability to monitor the financial system and to watch out for problems and to try to address them. I've been in many conversations with insurance companies, pension funds, and so on.
On misallocation, we're trying to get the economy back to a more full employment situation. When we're this far away from full employment, it's not obvious that the investments that are being made are the right investment. They may be insufficient, for example, because there's not enough demand for product.
I guess the last comment I would make, you asked me before about deficits, and I understand that concern, but I think that the effect of fed policy, independent of all the other factors, on Treasury rates is modest, and in any case, rates will rise eventually, and if the investors would lose confidence in U.S. federal fiscal policy, there is nothing the Fed could do to prevent those rates from rising. So I trust that Congress would understand that independent of the Fed's policy here, which is aimed at strengthening the economy which also helps deficits, that it's extremely important to be looking ahead and making appropriate plans for stabilizing the deficit.