Lower long-term interest rates sparked a housing recovery that is boosting household wealth through rising home prices, injecting a dose of confidence into the greater consumer economy, Federal Reserve Chairman Ben Bernanke said while testifying before a U.S. Senate Banking Committee Tuesday.
In his testimony, the Fed chair basically admitted the Federal Open Market Committee is attempting to drive a recovery using interest rates to fuel certain asset purchases, including home purchases.
The Fed chair suggested the accommodative policies from his standpoint are working.
"By raising employment and household wealth—for example, through higher home prices—these developments have in turn supported consumer sentiment and spending," Bernanke said.
The Fed chair pointed to an uptick in housing sentiment and more auto purchases as natural results of the Fed’s asset purchases and low interest rates.
He also expressed no interest or indication that the Fed would cut back on its monthly $40 billion mortgage-backed securities purchases as long as the central bank is still attempting to lower the U.S. unemployment rate.
Still, the Fed Chair admitted risks remain when dealing with long-term low interest rates and Fed mortgage-bond purchases.
"Highly accommodative monetary policy also has several potential costs and risks, which the committee is monitoring closely," Bernanke said.
"For example, if further expansion of the Federal Reserve's balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC's price-stability objective at risk."
Still, Bernanke said he’s confident the Fed has the tools it needs to tighten its aggressive monetary policies when the time comes.
One of the risks would be low interest rates prompting portfolio managers to reach for yield with more credit risk or excessive leverage.
But before carving back Fed policy, Bernanke said the benefits of accommodative policies still have a place in today’s market.
"Although accommodative monetary policies may increase certain types of risk-taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses," Bernanke said.
"In any case, the Federal Reserve is responding actively to financial stability concerns through substantially expanded monitoring of emerging risks in the financial system, an approach to the supervision of financial firms that takes a more systemic perspective, and the ongoing implementation of reforms to make the financial system more transparent and resilient."