"Federal Reserve's purchases of longer-term securities do not affect very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates. By easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy, thereby strengthening the economic recovery."Bernanke said the Fed has the ability to pay interest on reserve balances held at Federal Reserve Banks, allowing the agency "to put upward pressure on short-term market interest rates and thus to tighten monetary policy when needed, even if bank reserves remain high." Looking forward, the Fed Chairman said the nation is still wanting for jobs after adding one million positions in 2010, not nearly enough to replace the 8 million jobs lost in 2008 and 2009. Bernanke told the Committee "this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market." Write to Kerri Panchuk.
Bernanke: Lagging real estate drags down investments
Despite the nation seeing a robust increase in business investments last year, the real estate sector remains weak with construction lagging and foreclosed homes still littering the market, Federal Reserve Chairman Ben Bernanke testified before the U.S. House Committee on the Budget Wednesday. During his testimony, the Chairman said while unemployment remains high, evidence of a "self-sustaining recovery" driven by consumer and business spending has surfaced in economic data. He added that real consumer spending grew at an annual rate of 4% in the fourth quarter. During his testimony, the Chairman found himself face-to-face with critical lawmakers who have opposed the Fed's most recent efforts to stimulate the economy -- most notably its emphasis on qualitative easing. Bernanke and the Fed have been widely criticized for enacting a second round of quantitative easing in November, which essentially allowed the Fed to purchase $600 billion in Treasury debt to stimulate the economy. The move sparked concerns over price inflation, which Bernanke indirectly addressed in his testimony Wednesday. "My colleagues and I have said that we will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices," he said. "In particular, we remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly-accommodating policy stance at the appropriate time," he added. Bernanke said the large-scale purchase of long-term securities was the Fed's only alternative with its normal policy of lowering the federal funds rate compromised by the rate already hovering near zero. "Although large-scale purchases of longer-term securities are a different monetary policy tool than the more familiar approach of targeting the federal funds rate, the two types of policies affect the economy in similar ways," Bernanke explained.