Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee on Wednesday, saying that he would be “supportive of a less front-loaded set” of short-term spending cuts.
“My suggestion for your consideration is to align the timing of your fiscal consolidation better with the problem, that is to do somewhat less in the very near term when it will have the greatest impact on growth and jobs and where the Federal Reserve doesn’t have any scope to offset it and instead to focus on the longer term where the real problems I think still remain,” Bernanke said, Reuters reports.
Bernanke also touched on the Federal Reserve’s bond-buying program, saying that it had a positive impact on the housing market.
“The evidence thus far is that the housing market has hit the bottom and is recovering,” Bernanke said, according to Reuters. “We’ve seen rising prices over the last year or so. We’ve seen some significant increases in starts and sales. Foreclosures are still too high but they’re coming down. The number of people under water on their mortgages is coming down. So we’re still far from where we’d like to be, but the evidence is that the housing market is strengthening.”
Additionally, Bernanke said that reducing interest rates on excess reserves held by Federal Reserve banks to a level below zero would have a positive effect on the economy.
“If we cut the interest on reserves…it would have a very, very small effect, in the right direction, but a very, very small effect on the incentives of banks to make loans,” Bernanke said, Reuters reports. “It’s in the right direction but one of the reasons that we hesitated to do that is because it would also lower returns throughout the money markets in our economy and would create some problems in terms of the functioning of money markets, the federal funds market and other short-term cash markets. So it’s not clear that the benefits in terms of more stimulus outweigh the costs in terms of market functioning.”
Bernanke also said that low interest rates were necessary to the recovery of the U.S. financial system.
“The economy will get stronger because of good policies, and that in turn will cause rates to rise in a sustainable way,” Bernanke said, according to Reuters. “If we were to raise rates prematurely we would kill the recovery and rates would come down, and we would have a long-term situation with very low rates.”