Email sent to members of the St. Louis Federal Reserve Board of testimoney by Ben Bernanke before the Committee on the Budget, U.S. House of Representatives

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Western Kentucky UniversityTopSCHOLAR®Faculty/Staff Personal Papers WKU Archives Records6-9-2010UA36I/29 Gary Ransdell - Fed. Reserve Board -Ben Bernanke Committee on BudgetSt. Louis Federal Reserve BoardFollow this and additional works at: http://digitalcommons.wku.edu/fac_staff_papersPart of the Finance and Financial Management Commons, and the International BusinessCommonsThis Other is brought to you for free and open access by TopSCHOLAR®. It has been accepted for inclusion in Faculty/Staff Personal Papers by anauthorized administrator of TopSCHOLAR®. For more information, please contact connie.foster@wku.edu.Recommended CitationSt. Louis Federal Reserve Board, "UA36I/29 Gary Ransdell - Fed. Reserve Board - Ben Bernanke Committee on Budget" (2010).Faculty/Staff Personal Papers. Paper 8.http://digitalcommons.wku.edu/fac_staff_papers/8From: Mary.H.Karr@stls.frb.org [mailto:Mary.H.Karr@stls.frb.org]  Sent: Wednesday, June 09, 2010 7:13 PM Subject: FedDigest, June 9, 2010: Chairman Bernanke's Testimony on Economic and Financial Conditions and the Federal Budget  Before the Committee on the Budget, U.S. House of Representatives  This document is not an official transcript. The text is selectively drawn from the original and summarized. Full text:  http://www.federalreserve.gov/newsevents/testimony/bernanke20100609a.htm   The Economic Outlook  The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year. Moreover, the economy--supported by stimulative monetary policy and the concerted efforts of policymakers to stabilize the financial system--appears to be on track to continue to expand through this year and next. The latest economic projections of Federal Reserve Governors and Reserve Bank presidents, made near the end of April, anticipate that real gross domestic product will grow in the neighborhood of 3 1/2 percent over the course of 2010 as a whole and at a somewhat faster pace next year. This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued.   Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity. Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions.   Investment in new equipment and software is expected to be supported by healthy corporate balance sheets, relatively low costs of financing of new projects, increased confidence in the durability of the recovery, and the need of many businesses to replace aging equipment and expand capacity as sales prospects brighten.   At the same time, significant restraints on the pace of the recovery remain.…Housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit. Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions. Meanwhile, pressures on state and local budgets, though tempered somewhat by ongoing federal support, have led these governments to make further cuts in employment and construction spending.   We have begun to see some modest improvement recently in employment, hours of work, and labor income. In all likelihood, however, a significant amount of time will be required to restore the nearly 8 1/2 million jobs that were lost over 2008 and 2009.   On the inflation front, recent data continue to show a subdued rate of increase in consumer prices.…A moderation in inflation has been clear and broadly based….To date, long-run inflation expectations have been stable.   Developments in Europe  Since late last year, market concerns have mounted over the ability of Greece and a number of other euro-area countries to manage their sizable budget deficits and high levels of public debt. By early May, financial strains had increased significantly as investors focused on several interrelated issues, including whether the fiscally stronger euro-area governments would provide financial support to the weakest members, the extent to which euro-area growth would be slowed by efforts at fiscal consolidation, and the extent of exposure of major European financial institutions to vulnerable countries.   U.S. financial markets have been roiled in recent weeks by these developments, which have triggered a reduction in demand for risky assets: Broad equity market indexes have declined, and Treasury yields have fallen, primarily as a result of safe-haven flows that boosted the demand for Treasury securities.   In response to these concerns, European leaders have put in place a number of strong measures. Countries under stress have committed to address their fiscal problems. A major assistance package has been established jointly by the European Union (EU) and the International Monetary Fund (IMF) for Greece. To backstop near-term financing needs of its members more generally, the EU has established a European Financial Stabilization Mechanism with up to 500 billion euros in funding, which could be used in tandem with significant bilateral support from the IMF.   In addition, to address strains in European financial markets, the European Central Bank (ECB) has begun purchasing debt securities in markets that it sees as malfunctioning, and has resumed auctions of three- and six-month loans of euros in unlimited quantities to borrowers with appropriate collateral. To help ease strains in U.S. dollar funding markets, the Federal Reserve has reestablished temporary U.S. dollar liquidity swap lines with the ECB and other major central banks. To date, drawings under these swap lines remain quite limited but they are nevertheless providing an important backstop for the functioning of dollar funding markets. Our ongoing international cooperation sends an important signal to global financial markets that we will take the actions necessary to ensure stability and continued economic recovery.   The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities.   Fiscal Sustainability  Ongoing developments in Europe point to the importance of maintaining sound government finances. In many ways, the United States enjoys a uniquely favored position. Nevertheless, failure to achieve fiscal sustainability will, over time, sap the nation’s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.   Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets. As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years.   Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies show a structural budget gap that is both large relative to the size of the economy and increasing over time.   Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes. To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.     Unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.    This material is intended for authorized users only. No unauthorized distribution.  

UA37/29 Gary Ransdell - Fed. Reserve Board - Ben Bernanke Committee on Budget

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UA37/29 Gary Ransdell - Fed. Reserve Board - Ben Bernanke Committee on Budget

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