Transcript: Ben Bernanke's First Congressional Testimony as Fed Chair
Wednesday, February 15, 2006; 1:10 PM
The following are opening remarks by the chairman and ranking member of the House Financial Services Committee and Federal Reserve Chairman Ben Bernanke.
REP. MICHAEL OXLEY (R-OH): Chairman Bernanke, welcome to the House Financial Services Committee. And on behalf of the entire committee, congratulations on your confirmation as the 14th chairman of the Federal Reserve Board.
We look forward to getting to know you and gaining a better understanding of how you intend to run the Federal Reserve.
Even though this is your first appearance before this committee, we're well familiar with the Fed, your staff and the work of the Fed in setting monetary policy and supervising banks and financial holding companies.
Based on my brief conversation with you and your amazingly smooth confirmation hearings, I'm confident that you will be successful as your predecessor.
I know this setting and this testimony can be intimidating. I hope it puts you at ease to know that you will have numerous opportunities to testify before this committee and the Congress.
As a matter of fact, you're mandated by law to appear here twice each year.
I'm sure you're comforted by that.
This morning, the press and the markets will focus on your every word and gesture. This committee will take a long-term view and, I hope, focus more on public policy, not the fleeting gyrations of the markets.
Your predecessor, and over time the members of this committee, have come to view this hearing as an ongoing dialogue between an independent Fed and the elected representatives of the American public. These hearings have become the highlight of our year. I hope they will become the highlight of yours and that, like Chairman Greenspan, you will use them as an opportunity to hear a wide range of views and take the temperature of more parts of the country than you can visit in a year.
You are addressing us at a time when there is universal agreement that monetary policy is where it should be and that the economy is thriving.
We can report that the U.S. economic growth is steady and strong. In fact, we are beginning the fifth full year of the current expansion.
But we face some uncertainty abroad, and we can be assured of the likelihood that there will always be uncertainty abroad. Our national economic performance is the envy of the world.
Americans are well-aware of the economy's steady growth, low inflation and productivity gains. Consumer confidence numbers are optimistic and the economic predictions show annual growth in the 3 to 4 percent range for the short and intermediate term.
Alan Greenspan has handed you the wheel of monetary policy at a time of unparalleled growth and prosperity in America. While federal law requires that the Federal Reserve conduct monetary policy in a way that ensures maximum employment, stable prices and moderate long-term interest rates, we know that monetary policy is only one tool to achieve that goal. Another equally important tool is fiscal policy, as set by Congress in the annual budget, and tax policy.
As you contemplate the start of your tenure as chairman of the Fed, I pledge to you to use my influence and the influence of this committee not only to support you in your work, but also to see to it that Congress conducts fiscal policy with the same acumen as the Fed has shown in monetary policy.
I'm confident we can maintain the excellent track record of the U.S. economy if we work together and understand each other's goals.
We will face challenges together in the future. Some will be self-inflicted and some will be inflicted upon us. Let us use this relatively quiet time to begin our dialogue, fine-tune the monetary and fiscal policy, and pledge to work together.
Mr. Chairman, it's a pleasure to have you before the committee, your first appearance before our committee on monetary policy.
And again, congratulations on your outstanding career before here and your confirmation by the Senate.
And I now yield to the gentleman from Massachusetts for his opening statement.
REP. BARNEY FRANK (D-MASS): Thank you, Mr. Chairman.
And, Mr. Chairman, thank you. And thank you for the courtesies you have extended to us.
You have made yourself very available for the kind of conversations that will be helpful in our having to work together, including being able to articulate those legitimate policy disagreements that are part of a democracy.
I just want to apologize in advance, because the flood insurance bill has been scheduled to come up. And I'm going to go over and, after I do my questioning, I'm sorry to say to you -- but I will be on the floor and come back again. So I apologize for that.
But I welcome the chance to talk to the chairman, because I think we are facing a kind of crisis in our economy.
I am glad to see that economic growth is steady and solid. I agree with the projections that it will be good going forward.
But we face a problem we haven't faced for a long time in America. I'm not enough of an economic historian to know when, if ever, that was.
There is a decoupling between growth in the gross domestic product and the economic situation of the average American.
The report documents that -- the monetary report to Congress. On page nine of the report -- page eight: "With profits posting further solid gains in 2005," et cetera; and on page nine: "Corporate profits continue to grow strongly in 2005. The ratio of before-tax profits of domestic nonfinancial corporations to that sector's gross value and it rose to more than 12 percent; near its 1997 peak. Operating earnings per share for S&P 500 firms appear to have been nearly 14 percent above that level four quarters earlier."
That's explained in part by the growth in productivity. It was not as high last year as it's been, but it was still considerably above trend.
And if you look at productivity over the last five years, as has been noted, it has been very high.
And then we get to page 17: "Increases in hourly labor compensation were moderate in 2005." In fact, real wages, wages paid to people who work for other people, taking into account inflation, have not gone up for years. They have been flat.
What we have is an economy in which, thanks to increased productivity, gross domestic product goes up and a very, very large share -- an excessive share of the increased wealth has gone to a very small number of people who own the capital.
Now, obviously, for the system to work, there has to be compensation for people who own capital. No one is, I hope, arguing that that shouldn't happen at all. But in recent years, that has become disproportionate. Your predecessor had acknowledged that on several occasions.
You have wages flat; you have insecurity caused by pensions being underfunded, being abandoned, defined benefits going over to 401(k)s; you have medical care costs increasing, the extent to which workers have to pay them.
And the consequence of this -- and it's something that people complain, but I will tell you that I was in Davos, listening to a leader of one of our financial institutions lament the fact that the American people seem so unimpressed with globalization, so resistant to the effort to adapt that very productivity which many believe is so important for the economy. And I share that.
And he said, "Recent studies show that the globalization adds a trillion dollars a year to the American economy. That's $9,000 per family. Why are Americans so resistant to something that adds $9,000 per family?"
And my answer was, "Because they don't have the $9,000. Not only do they not get the $9,000," I said to this individual, "They think you have that $9,000. In fact, you have the $9,000 for about 2,000 of them or more."
And this disparity, this problem is why you now encounter increasing resistance to trade, to deregulation, to the very flexibility that many think are important for the economy.
So these numbers are right here: productivity goes up, the economy is going very well; but average Americans correctly assert that they are getting little if any of the benefit.
And I know people say, "Well, you know, globalization -- after all, T-shirts are a lot cheaper now than they used to be a Wal-Mart and elsewhere." Remember, I'm talking about real wages. That factors in the cost of living.
So when you talk about real wages being flat, you can't double- count the low prices. Real wages is, obviously, nominal wages discounted by inflation.
And so if we do not do a better job in this country of not getting rid of inequality, which is essential for our society's markets to function, but diminish it, you will continue to have the resistance to many of the policies that people advocate. And that, I think, is a major task before us.
We have to end this decoupling of growth of the GDP and the economic well-being of the average American.
BEN BERNANKE: Mr. Chairman and members of the committee, I am pleased to be here today to present the Federal Reserve's monetary policy report to the Congress.
I look forward to working closely with the members of this committee on issues of monetary policy, as well as on matters regarding the other responsibilities with which the Congress has charged the Federal Reserve system.
The U.S. economy performed impressively in 2005. Real gross domestic product increased a bit more than 3 percent, building on the sustained expansion that gained traction in the middle of 2003. Payroll employment rose 2 million in 2005, and the unemployment rate fell below 5 percent. Productivity continued to advance briskly.
The economy achieved these gains despite some significant obstacles: energy prices rose substantially yet again, in response to increasing global demand, hurricane-related disruptions to production, and concerns about the adequacy and reliability of supply.
The Gulf Coast region suffered through severe hurricanes that inflicted a terrible loss of life; destroyed homes, personal property, businesses, and infrastructure on a massive scale; and displaced more than a million people.
The storms also damaged facilities and disrupted production in many industries, with substantial effects on the energy and petrochemical sectors, and on the region's ports.
Full recovery in the affected areas is likely to be slow.
The hurricanes left an imprint on aggregate economic activity as well, seen in part in the marked deceleration of real GDP in the fourth quarter.
However, the most recent evidence, including indicators of production, the flow of new orders to businesses, weekly data on initial claims for unemployment insurance, and the payroll employment and retail sales figures for January, suggests that the economic expansion remains on track.
Inflation pressures increased in 2005. Steeply rising energy prices pushed up overall inflation, raised business costs and squeezed household budgets.
Nevertheless, the increase in prices for personal consumption expenditures excluding food and energy, at just below 2 percent, remained moderate, and longer-term inflation expectations appear to have been contained.
With the economy expanding at a solid pace, resource utilization rising, cost pressures increasing and short-term interest rates still relatively low, the Federal Open Market Committee over the course of 2005 continued the process of removing monetary policy accommodation, raising the federal funds rate 2 percentage points in eight increments of 25 basis points each.
At its meeting on January 31 of this year, the FOMC raised the federal funds rate another 0.25 percentage point, bringing its level to 4.5 percent.
At that meeting monetary policymakers also discussed the economic outlook for the next two years. The central tendency of the forecasts of members of the Board of Governors and the presidents of Federal Reserve Banks is for real GDP to increase about 3.5 percent in 2006, and 3 percent to 3.5 percent in 2007.
The civilian unemployment rate is expected to finish both 2006 and 2007 at a level between 4.75 percent and 5 percent.
Inflation, as measured by the price index for personal consumption expenditures excluding food and energy, is predicted to be about 2 percent this year, and 1.75 to 2 percent next year.
While considerable uncertainty surrounds economic forecast extending nearly two years, I am comfortable with these projections.
In the announcement following the January 31st meeting, the Federal Reserve pointed to risks that could add to inflation pressures. Among those risks is the possibility that to an extent greater than we now anticipate high energy prices may pass through into the prices of non-energy goods and services, or have a persistent effect on inflation expectations.
Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization. Gauging the economy's sustainable potential is difficult. And the Federal Reserve will keep a close eye on all the relevant evidence and be flexible in making those judgments.
Nevertheless, the risk exists that aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately, in the absence of countervailing monetary policy action, to further upward pressure on inflation.
In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur.
Not all of the risks to the economy concern inflation.
For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected, and would not be inconsistent with continued solid growth of overall economic activity.
However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely.
Slower growth in home equity in turn might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated.
The possibility of significant further increases in energy prices represents an addition risk to the economy. Besides affecting inflation, such increases might also hurt consumer confidence and thereby reduce spending on non-energy goods and services.
Although the outlook contains significant uncertainties, it is clear that substantial progress has been made in removing monetary policy accommodation. As a consequence, in coming quarters the FOMC will have to make ongoing provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data.
As I noted, core inflation has been moderate despite sharp increases in energy prices. A key factor in this regard has been confidence on the part of the public and investors in the prospects for price stability.
Maintaining expectations of low and stable inflation is an essential element in the Federal Reserve's effort to promote price stability. And thus far the news has been good: Measures of longer- term inflation expectations have responded only a little to the larger fluctuations in energy prices that we have experienced, and for the most part they were low and stable last year.
Inflation prospects are important, not just because price stability is in itself desirable and part of the Federal Reserve's mandate from the Congress, but also because price stability is essential for strong and stable growth of output and employment.
Stable prices promote long-term economic growth by allowing households and firms to make economic decisions and undertake productive activities with fewer concerns about large or unanticipated changes in the price level and their attendant financial consequences.
Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability in output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the economy.
Similarly, the attainment of the statutory goal of moderate long- term interest rates requires price stability, because only then are the inflation premiums that investors demand for holding long-term instruments kept to a minimum.
In sum, achieving price stability is not only important in itself. It is also central to attaining the Federal Reserve's other mandated objectives of maximum sustainable employment and moderate long-term interest rates.
As always, however, translating the Federal Reserve's general economic objectives into operational decisions about the stance of monetary policy poses many challenges.
Over the past few decades, policymakers have learned that no single economic or financial indicator -- or even a small set of such indicators -- can provide reliable guidance for the setting of monetary policy.
Rather, the Federal Reserve, together with all modern central banks, has found that the successful conduct of monetary policy requires painstaking examination of a broad range of economic and financial data, careful consideration of the implications of those data for the likely path of the economy and inflation, and prudent judgment regarding the effects of alternative courses of policy action on prospects for achieving our macroeconomic objectives.
In that process, economic models can provide valuable guidance to policymakers. And over the years, substantial progress has been made in developing formal models and forecasting techniques.
But any model is, by necessity, a simplification of the real world, and sufficient data are seldom available to measure even the basic relationships with precision.
Monetary policymakers must therefore strike a difficult balance, conducting rigorous analysis informed by sound economic theory and empirical methods, while keeping an open mind about the many factors, including myriad global influences, at play in a dynamic modern economy like that of the United States.
Amid significant uncertainty, we must formulate a view of the most likely course of the economy under a given policy approach, while giving due weight to the potential risks and associated costs to the economy should those judgments turn out to be wrong.
During the nearly three years that I previously spent as a member of the Board of Governors and of the Federal Open Market Committee, the approach to policy that I have just outlined was standard operating procedure under the highly successful leadership of Chairman Greenspan.
As I indicated to the Congress during my confirmation hearing, my intention is to maintain continuity with this and the other practices of the Federal Reserve in the Greenspan era.
I believe that with this approach, the Federal Reserve will continue to contribute to the sound performance of the U.S. economy in the years to come.