The biggest surprise about Fed Chairman Ben Bernanke’s testimony Wednesday afternoon wasn’t what he said. It was the reaction in the stock markets.
Testifying at the Senate Banking Committee, Bernanke acknowledged that the economic outlook is “unusually uncertain” and that “we remain prepared to take further policy actions” if the recovery begins to stall.
But Bernanke also said that the Fed wasn’t yet ready to hit the accelerator, and Wall Street was apparently hoping for more. The Dow Jones Industrial Average dropped about 150 points after Bernanke began talking around 2 p.m. That may have reflected dashed hopes after rumors on Tuesday that Bernanke would announce a tweak in policy to encourage more lending.
Those were almost certainly unrealistic expectations, if only because changes in monetary policy are not announced by the Fed chairman but rather are revealed in written communiqués by the Fed’s full policy-making committee. “If the economy appears to be faltering, we at least need to review our options," Bernanke said in response to questions from lawmakers. But, he cautioned: “We have not gotten to the point where we can tell you precisely what the leading options are.”
The Fed chairman was under pressure from lawmakers as soon as he arrived. “My question is whether the Fed can do a little more," said Sen. Christopher J. Dodd, D-Conn., chairman of the committee, noting that nearly 7 million people have been jobless for more than 27 weeks and that “banks are now sitting on extraordinary quantities of excess reserves.”
Sen. Richard Shelby, R-Ala., said he wanted to know “what the Fed’s contingency plans are in case of a double-dip recession.” Bernanke outlined several ways the Fed could provide another round of stimulus if it has to. It could communicate plans to keep short-term interest rates at zero for longer than it has previously suggested. It could stop paying interest on reserves that banks keep on deposit at the Fed, which would encourage them to lend the money out. And it could resume its purchases of long-term Treasury bonds and mortgage securities to help push down interest rates.
But he said Fed officials still expect the economic recovery to gain traction, and they do not expect a double-dip recession. Lawmakers also pressed Bernanke about whether Congress should provide more economic stimulus, as many Democrats want, or focus on deficit reduction, as Republicans and more conservative Democrats want. Bernanke said it was still too early to start cutting back on government spending, but he said the government ought to come up with a plan to get the annual deficit down from about 10 percent of gross domestic product this year to 3 percent in 2015.
“At the current moment, the large deficits, as unattractive as they are, are important for supporting economic activity," he told the panel. “I would be reluctant to withdraw support at this time.”
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