Fed Chairman Bernanke was before the Senate Banking Committee today in his semiannual monetary and economic report. Many of the questions from the Senators dealt with the Libor scandal. Consequently, little time was spent on monetary policy. As expected, Chairman Bernanke didn't provide any clear signs that QE3 was near.
In February, Senator Pat Toomey (R-PA) did a good job at describing his concerns with the Fed's zero interest rate policies. This time, Senator Toomey focused on the Libor Scandal. However, another Senator did take some time to question Chairman Bernanke on monetary policy and the downsides of another round of quantitative easing. That senator was Jim DeMint, a Republican from South Carolina. Below is an excerpt of his questions and Chairman Bernanke's response:
Senator Jim DeMint (R-SC):
You mentioned costs and benefits of some of the things that you are clearly considering such as quantitative easing has costs that we don't talk about at least on our side as well as keeping the interest rates low.
You are well aware that keeping interest rates where they are is costing Americans about 400 billion dollars a year in loss interest on any savings that they might have. So there's a real cost. And over the last four years probably about a trillion dollars in loss. So people who are actually trying to save and put aside dollars are on a negative tread mill in the sense that they're losing value on their dollars. So there's a cost to that stimulus effect.
And also quantitative easing that you are clearly considering, our own Federal Reserve Bank of New York estimates that about 50 percent of the value of the S&P over the last decade is related to Fed action and the build up around Fed action of quantitative easing. My concern now is what we're seeing is not an increase in the value of stocks, but a projection and a loss in the value of our dollar.
While we talk about no inflation, I think what we are talking about is no visible inflation at this time because clearly if we're printing more money to buy more of our national debt, I think you'd agree that the federal reserve through intermediaries has bought over half of our debt in the last couple of years, we are diluting the value of our dollar over time. While it may not show up today or tomorrow, it's inevitable that it will show up, and I think we see that in the reflection of the price of stocks because it's obvious that doesn't reflect the long-term projections of value and profits as much as it does playing a market in what's coming out of the federal reserve.
So my concern very much now is another announcement of quantitative easing which might inflate the stock market temporarily but another short-term effort that might help employment in the short term but actually reduce the value of the dollar and therefore everything we work for here in this country.
So how are you gauging the cost of another round of quantitative easing?
Fed Chairman Ben Bernanke:
Let me respond to the specifics that you raised.
On savings, we understand the low interest rates are hardship for many people.
The reason interest rates are low, of course, is that we're trying to promote a recovery in the economy. People who save hold fixed income type of securities like CDs or Treasury bonds, but they also hold stocks or corporate bonds or small businesses or other types of assets which depend on the strength of the economy. And if raising interest rates might help some folks but if it causes the economy to weaken considerably, it would be bad for investors broadly speaking.
So what we're trying to do, of course, as our mandate suggests is to strengthen the economy which in turn should make America a more attractive place to invest, provide higher returns for everyone investing in the United States.
On the dollar inflation, I appreciate your concern, and obviously that's one of the things we pay very close attention to. We have not seen inflation yet though, and the dollar has been in fact recently a good bit stronger. And we are comfortable that we have the tools to unwind these policies in a way that will not threaten inflation. But as I said to Senator Schumer, we take both sides of the mandate very seriously as we are looking to try help reduce unemployment, we also want to be confident that we maintain price stability in the United States, and thus far we have been successful in doing that.
You will probably recognize Chairman Bernanke's responses since they are very close to what he has said in previous testimonies and press conferences. In summary, he continues to maintain that low interest rates are required for an economic recovery and that the Fed has the tools to prevent inflation when the economy does improve.
I was hoping to see a question about the Fed's language in its statements about the date when they expect to start raising interest rates. That date is currently late 2014, and I'm worried the Fed may soon push that out to 2015 or 2016. I worry these dates will make it impossible for the Fed to decide to raise rates before these dates. Besides the impact to savers, there are reasons to question this policy based on downside effects to the economy. For example, people have no reason to borrow and spend today if they think rates will stay low for several more years. Hopefully, we'll see questions on this topic tomorrow when Chairman Bernanke testifies before the House Financial Services Committee.