Money Supply

Hello and welcome to today’s live blog on Federal Reserve chairman Ben Bernanke’s testimony on monetary policy to the Senate’s Committee on Banking, Housing and Urban Affairs. 

The hearing begins at 10am DC time (3pm UK time). 

All times are UK time. 

 17.26 This live blog is now closed.

17.26 That’s the last of the questions. The hearing is adjourned.

17.22 On alternatives to Libor, Bernanke says the general collateral repo rate is a “possibility”. Another possibility would be the overnight index swap rate. Crucially, both a observable market rates, rather than rates reported by banks. “I suspect [the alternatives] will be seriously considered unless measures are taken to restore confidence in Libor,” he says. “The problem is we have so many contracts that are based on Libor.”

17.17 The Fed chair (and scholar of the Great Depression) on European monetary and political union:

Ben Bernanke: European institutions were created after World War II to avoid any future war. Closer political union is something that many European leaders consider to be important…

…The Germans have an exchange rate which is probably weaker than if they had the Deutsche Mark. They have a more competitive currency and a captive market for selling their exports that would not be there without the euro.

17.10 Bernanke confirms the Fed was not aware of the manipulation of Libor that occurred before the financial crisis until recent weeks. Was this criminal activity? “Based on what I know, what I’ve read, yes,” the Fed chair says.

Regarding the lowballing of Libor during the market turmoil, he says that more sophisticated investors were aware of it.

16.55 Literary reference du jour. This from Senator Mark Warner in discussing the fiscal cliff: “Waiting for Congress is a bit like Waiting for Godot.” Indeed it is. Bernanke notes that the US is not quite Greece, but reiterates that lawmakers need to act.

The Fed chair notes that global conditions are not nearly as bad as in the autumn of 2008. “Compared with what we saw in the aftermath of [Lehman Brothers' collapse], nothing is happening globally on that scale,” he says.

16.46 What will the Libor scandal cost the banks? The Fed chair is dismissive of analysts’ estimates and labels them “back of the envelope types of calculations”. He adds: “We don’t know what the costs will be and it would be irresponsible to guess.” Hardly what the senators wanted to hear, but in all fairness a decent answer.

16.41 Bernanke repeats that the Fed is not happy that the British Bankers’ Association didn’t implement all of the NY Fed’s recommendations (see 15.47): “They’ve made some changes. But not as much as we would like. We’ve spoken to the Bank of England.”

16.27 The FT’s Shahien Nasiripour had written about claims made by Fed general counsel Scott Alvarez that the central bank did not have the jurisdiction to act on signs Libor was being manipulated:

16.20 Harsh but fair?

16.12 More on Libor. “It’s a major problem for confidence in our financial system and we need to address it,” Bernanke says. So why has the Fed allowed the rate of interest on so many financial products to be set on the basis of Libor?

There’s more Brit blaming from Bernanke: “Libor is constructed by this UK organisation. [Reform] has to be an international effort.” The Fed chair then suggests two approaches for reform.

First, fix Libor by increasing the monitoring of the reporting process. The other strategy would be to go from a reported rate to an observable market rate — as has also been suggested by Sir Mervyn King. But this change would not be simple to make because Libor is so deeply ingrained in so many financial contracts, the Fed chair acknowledges.

16.05 The Fed chair says he’s “comfortable” that the Fed can shrink its balance sheet as and when the need arises.

15.58 Bernanke reiterates his previous comments on the fiscal cliff. Delaying fiscal balance would be “a very bad outcome”, he says. Quite.

What else could the Fed do? Interestingly, he mentions that the Fed hasn’t ruled out cutting the interest rate it pays on reserves held at the US central bank.

The Fed’s ‘interest on reserves’ tool is equivalent to the ECB’s deposit rate. Would the FOMC consider following the ECB’s lead and cutting the interest it pays on reserves to zero? Bernanke’s comments suggest it is an option.

15.47 Bernanke takes a swipe at the British Bankers’ Association, the trade body that compiles the data used to calculate Libor. This from FTAlphaville’s Joseph Cotterill:

They’re the six recommendations that then-NY Fed president Tim Geithner made in this email to Sir Mervyn King, governor of the Bank of England.

15.42  The Fed chair on asset purchases: they do work, but are subject to diminishing returns. ”My own assessment is that QE and operation twist have been effective. It was most evident in QE1. QE2 was certainly effective in addressing what was getting to be a worrisome risk of inflation. My view and the view of the Fed is that [QE2] also contributed to growth,” Bernanke says.

More importantly, the Fed chair clearly believes further asset purchases could be useful: “They shouldn’t be used lightly, but nevertheless they do still have some capacity to support the economy.” Whether or not they will be used depends on whether the US economy is “stuck in the mud” and price stability concerns, he says.

15.35 This won’t go down well with markets. Mr Bernanke says Operation Twist and communication tools, notably forward guidance on how long rates will be kept at ultra low levels, are the two main instruments at the Fed’s disposal. Not more asset purchases (QE3) then.

However, he says that the rate-setting FOMC will look at other tools at its next meeting.

15.32 Predictably enough, the first question is on the Libor scandal. Mr Bernanke says what’s been disclosed already is not only “very troubling” in and of itself, but also that it affects public confidence in the financial system.

Mr Bernanke says the Libor process is “structurally flawed” and details meetings arranged between the New York Fed and the Federal Reserve in Washington to inform the Fed board what they’d found out. The Fed chair also reveals that then-Fed governor Randall Kroszner was in touch with the British authorities on the subject of Libor. The chairman then describes New York Fed’s response as “substantial”.

15.26 The questions now begin.

15.23 Former Fed director of monetary affairs Vincent Reinhart’s take on Bernanke’s testimony:

It’s worth keeping an eye on what Reinhart says. He’s one of the best Fed watchers out there. This from another of the leading watchers of the US central bank, Wrightson’s Lou Crandall:

Lou Crandall: Chairman Bernanke’s formal testimony included no direct hints about the direction of policy beyond what was said in the June FOMC statement, but also included nothing to discourage the market from expecting more action later in the year.

We suspect that the Q&A session will emphasize the Fed’s willingness to take further steps, but the formal testimony was noncommittal.

15.15 The Fed chair finally begins his testimony. Here is FT US economics editor Robin Harding’s take on the remarks:

Robin Harding: The testimony may disappoint markets – which are on tenterhooks for a signal of further monetary easing from the Fed – because Mr Bernanke did not go beyond the Fed’s last statement that “it is prepared to take further action as appropriate to promote a stronger economic recovery”….

…Mr Bernanke said that recent data points to annualised growth of less than 2 per cent in the second quarter of 2012. “Households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low,” he said.

“Forward-looking indicators of investment demand – such as surveys of business conditions and capital spending plans – suggest further weakness ahead,” said Mr Bernanke. But he remarked: “We have seen modest signs of improvement in housing.”

Mr Bernanke chided Congress for its failure to act on fiscal policy, citing it as one of two main risks to the economy alongside the eurozone crisis, and warning against a repeat of the market volatility and loss of economic confidence caused by last summer’s debacle over raising the debt ceiling.

The Fed chairman has steadily ramped up his rhetoric on fiscal policy with each successive visit to Capitol Hill, but there is little sign that Congress is willing to compromise before the November election, even in order to boost growth.

15.14 Some reaction in the twittersphere to the Fed chair’s opening remarks.

15.12 Senator Tim Johnson’s opening remarks praise the Fed’s actions so far but ask what the central bank will do if the eurozone crisis deepens. Here’s a link for those wanting to watch the hearing live.

Senator Mike Crapo questions whether QE can do much good.

15.08 Bernanke’s prepared testimony is out.

The Fed chairman’s comments are downbeat. But there are no hints in his prepared remarks that further monetary easing is imminent. Let’s see what the Q&A brings…

15.02  Mr Bernanke takes his seat to deliver his opening testimony. Want to know who’ll be asking the questions today? Here’s more on the Senate Banking Committee’s membership.

14.55 Markets might have their begging bowls out in the hope Mr Bernanke will go for more QE. But the FT’s US markets editor Michael Mackenzie expects them to be disappointed. Watch this video clip for more.

14.50 Hello and welcome to today’s live blog on Ben Bernanke’s twice-yearly testimony on monetary policy to the US Senate. All ears will be tuned for any hints that QE3 is imminent.

Ahead of the testimony came news that US consumer price inflation remained at 1.7 per cent, a little short of the Fed’s inflation target of 2 per cent. That affords the central bank room to loosen monetary policy to boost the US economy.