Thoughts on Bernanke's Testimony
This week, Federal Reserve Chairman Ben Bernanke delivered his semiannual monetary update (also known as the Humphrey-Hawkins report) to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services. Entrepreneurs, like everyone else, are interested in getting the economy moving again. The top concerns of small business owners remain “poor sales” and “access to credit.” In addition, though, rising prices are on everyone’s mind – especially with the price of oil hovering around $100 a barrel . The prospect of higher commodity prices has the potential of squeezing business owners’ profitability at a most inopportune time – when otherwise the economy itself is starting to get some traction.
Indeed, Chairman Bernanke began his testimony highlighting the brighter economic outlook and said that the Federal Reserve Board is now expecting GDP growth of between 3.4 to 3.9 percent in 2011. This is in line with other economic forecasts, which all suggest GDP growing at least 3 percent this year. This includes CBO (3.1%), Kiplinger’s (3.25%), OMB (3.1%), NABE (3.3%), Survey of Professional Forecasters (3.2%), and the WSJ (3.5%). Almost every one of these forecasts was revised up following the extension of the Bush-era tax cuts in December. While many economists had expected this to occur, few had entered into their models a temporary lowering of the payroll tax for this year, which Bernanke acknowledged in the Q&A following his prepared remarks. Still, looking forward, the Chairman noted some challenges ahead which might complicate the recovery: slow growth in employment and housing, Middle East and Northern African turmoil, rising commodity prices, and fiscal problems at the state and local level.
Regarding commodity prices, the Federal Reserve has come under intense criticism for its decisions to purchase long-term government securities as a means of easing monetary conditions. The more recent action, taken at the August 2010 Federal Open Market Committee Meeting, included the purchase of up to $600 billion in long-term securities and is most commonly referred to as “QE2,” or the second round of “quantitative easing.” Critics have charged that QE2 has been ineffective and, by flooding the markets with new dollars, has ignited the run-up in commodity prices. Yet, Bernanke countered that QE2 has been effective; since the program began, he said that “downside risks to the recovery have receded, and the risk of deflation has become negligible.” Commodity price have been rising against a number of foreign currencies, not just the dollar, and are most likely the result of rising demand in emerging markets, he added.
The federal fiscal situation was the other main topic which was addressed at the Senate hearing. In questioning from Sen. Richard Shelby (R-AL), Chairman Bernanke replied that federal budget deficits and the overall debt are the “number one economic problem over the long-term.” He said that he was the first witness to testify to the National Commission on Fiscal Responsibility and Reform, and he suggested to them and the Congress that fixing the fiscal situation will bring long-term benefits and restored overall confidence. While he would not endorse any of the specifics of the Commission’s recommendations (at the urging of Sen. Michael Bennet, D-CO), he did suggest that the Erskine Bowles-Alan Simpson group “highlighted the size of the problem” and provided “at least one path forward,” of which there are many. (The Deficit Reduction Report, led by Alice Rivlin and Pete Domenici, from the Bipartisan Policy Center was also cited as an example.)
While Chairman Bernanke worried about the deficit, he also made it clear that the solution should be one that is long-term. He said that the tax code could be restricted, and that policymakers should not lose sight of the importance of research and development, education, etc., which will allow the private sector to move forward. Indeed, the challenge for the nation moving forward, much as I described in my earlier post, is the need to find fiscal solutions which balance our long-term financial solvency with sound policies which will promote economic growth. Entrepreneurs and all taxpayers are eager for such solutions.