Yesterday and today, Fed Chairman Ben Bernanke gave testimony before the Senate and House committees in his semiannual testimony to Congress on monetary policy and the economy. As described in this LA Times article:
Bernanke's remarks cheered Wall Street as investors and analysts concluded that the Fed's campaign to stimulate economic growth was unlikely to be slowed or halted any time soon.
One notable exchange at the Senate meeting was between Chairman Bernanke and Senator Elizabeth Warren. The Senator pressed the chairman about the problem of the market's perception that the big banks are too big to fail.
In today's House meeting, several committee members voiced concern about how the Fed's monetary policy is hurting savers and retirees. I have some excerpts below.
First, Rep. John Campbell (R-CA) as chairman of the Subcommittee on Monetary Policy and Trade gave an opening statement that detailed seven risks that he believed are "exceeding [the] now meager benefits of the current monetary policy." His fifth risk involved savers and retirees:
Number five is that savers and retirees are being forced into riskier assets in the search for some sort of yield. When this unwinds, that is going to be a problem for our savers and retirees. We all in economics learned early on as you get older take less risk but now what we find as people get older they are having to violate that principle and in search of some kind of yield are taking much much greater risk which could be a problem in the future.
Since it was an opening statement, Chairman Bernanke did not get a chance to respond to these risks. Chairman Bernanke did respond to questions asked by Rep. Shelley Moore Capito (R-WV). She described how the current monetary policy is "crushing our seniors." Here's an excerpt of that exchange:
Rep. Shelley Moore Capito (R-WV):
Many of us are in that sandwich generation trying to help our parents, and our parents are doing a pretty good job trying to help themselves, but they're relying on their good planning and investments if they have been lucky enough to invest. And the dividend and interest availabilities to them are crushing our seniors as they see their healthcare costs go up. And some of the policies that you put forward I think, and that the Fed has, has caused concern for those of us who are concerned about seniors who don't have the ability to get another job, that's played out for them.
What what can I tell my seniors back home that is going to give them some optimism that they're going to be able to rely on that good planning that they had to carry them through the senior years.
Fed Chairman Ben Bernanke:
Well I would say first that savers have many hats. They may own fixed income instruments like bonds, but they may also own stocks or a house or a business. All those other assets benefit when the economy strengthens and those values have gone up. The stock market is roughly doubled as you know in the past few years.
So for an investment perspective there are alternatives. More importantly though, you are not going to get strong returns in an economy that is fundamentally weak. The best way to get sustainable high returns to savers is to get the economy back to running on all cylinders.
It's somewhat paradoxical but in some ways the best way to get interest rates up is not to raise them too quickly because by keeping rates low now we can help the economy get stronger, we can create more jobs, we can create more momentum in the economy. That's the way to get a sustainable higher set of interest rates.
It's very striking that if you look at every other industrial country around the world, interest rates are about exactly where they are here.
That says something about the fundamentals which are very weak in most of these industrial countries, and until we can get greater forward momentum, we're not going to be able to see sustainable higher returns.
Chairman Bernanke's reply was similar to what he has said in past hearings. He said savers who own stocks and real estate have done well with the Fed's monetary policy and that the only way to get higher interest rates that are sustainable is for the economy to strengthen. Rep. Scott Garrett (R-NJ) pushed back on the premise that higher stock and real estate values should be looked at as a valuable result of the Fed's monetary policy. He asked Chairman Bernanke:
How you can suggest that an increase in the stock market is a positive indicator of your work in a cost-benefit analysis of the rest of the economy?
This was one of several questions asked by Rep. Garrett. He also asked how Chairman Bernanke could give advice that sounded like seniors should move their money into stocks. Chairman Bernanke was quick to clarify that he was not giving financial advice.
Unfortunately, Rep. Garrett tried to cover too many things in the short time he was allocated, but I thought his stock market question was useful. A lot of the stock market gains in recent years have been driven by the Fed's monetary policy. This could be a bubble that's not sustainable. The stock market will likely fall when the Fed starts moving toward tightening. It will probably also fall if the economy fails to improve. As we saw in 2001 and in 2008, stock market gains can vanish quickly. So in my opinion, Rep. Garrett made a good point that the increase in the stock market isn't a positive indicator that should be used to validate the Fed's monetary policy.