Federal Reserve Chairman Ben S. Bernanke defended the central bank's response to the global crisis and told a Senate panel considering his nomination to a second term that a retreat from record-low interest rates "will require careful analysis and judgment."
"We must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets and the economy recover," Bernanke, 55, told the Senate Banking Committee today. "My colleagues on the Federal Open Market Committee and I are committed to implementing our exit strategy in a manner that both supports job creation and fosters continued price stability."
Bernanke, who led the most expansive use of the Fed's powers in its 96-year history, defended the central bank's policies and made a case for its bank oversight authority, its regional structure and its independence. Many lawmakers have blamed the Fed for failing to curtail the excesses that led to the financial crisis and then overstepping its powers with bailouts of firms including New York-based insurer American International Group Inc. (AIG).
A Senate proposal would remove the Fed's authority to supervise banks, and legislation pending in both chambers would limit the central bank's ability to lend to troubled institutions and remove its rule-writing authority on consumer financial products.
The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions, a measure backed by Ron Paul, a Republican from Texas. The legislation had more than 300 co-sponsors and is supported by the AFL-CIO.
'Political Pressure' "The Congress created that exemption to protect monetary policy from short-term political pressures," Bernanke said today.
Bernanke said the Fed's credit policies helped finance 3.3 million loans to households, more than 100 million credit-card accounts, 480,000 loans to small businesses and 100,000 to larger businesses.
"Yet our task is far from complete," he told the Senate panel. "Far too many Americans are without jobs, and unemployment could remain high for some time even if, as we anticipate, moderate economic growth continues."
Senate Banking Committee Chairman Christopher Dodd said today he will support Bernanke's nomination and that Senator Bernard Sanders' effort to delay a vote on Bernanke's nomination for a second four-year will likely fail.
"I don't think so," Dodd said when asked today in a brief interview whether Sanders' attempt to delay or derail Bernanke's confirmation will succeed.
Economy Grows The economy expanded at a 2.8 percent annual rate in the third quarter, and financial markets have recovered, with the Standard and Poor's 500 Index up more than 23 percent this year. Still, unemployment is forecast to remain above 10 percent when the Labor Department releases the November jobs report tomorrow.
"The Federal Reserve remains committed to its mission to help restore prosperity and to stimulate job creation while preserving price stability," Bernanke said.
Bernanke defended the Fed's private-sector regional boards of directors after Dodd proposed changes that would give the White House and Congress a greater say in their composition. The boards nominate each bank's president, who votes on monetary policy.
The more than 270 people who serve on the Fed's private- sector boards of directors for its regional banks "provide valuable insights into current economic and financial conditions that statistics cannot," Bernanke said.
Main Street "The structure of the Federal Reserve ensures that our policymaking is informed not just by a Washington perspective, or a Wall Street perspective, but also a Main Street perspective."
The Fed chief didn't specifically address Dodd's proposal on directors in his prepared testimony.
The Fed has channeled liquidity to banks and markets for asset-backed securities and the commercial paper market, helping to unfreeze bank funding markets. The London interbank offered rate, or Libor, for three-month loans in dollars between banks was 0.225 percent yesterday, down from 1.42 percent at the start of the year.
The central bank is also purchasing $1.25 trillion in mortgage-backed securities, which has helped keep 30-year fixed rates on home loans below 5 percent for the past four weeks.
Conditions Improve Eight of the 12 regional Fed banks "indicated some pickup in activity or improvement in conditions," while the other four said conditions were little changed or mixed, the central bank said yesterday in its Beige Book business survey. The labor and commercial real estate markets remained "weak," the report said.
The most controversial components of Fed's backstops involved the Fed's purchase of $29 billion of securities in March 2008 to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co., and loans to keep AIG from default.
The Fed assistance "transferred tens of billions of dollars of cash" to AIG counterparties, a November report from the Office of the Special Inspector General for the Troubled Asset Relief Program said.
Bernanke has said he aided Wall Street to save U.S. households from a worse recession. Some Wall Street firms have thrived.
Bank Earnings Goldman Sachs Group Inc. (GS) said Oct. 15 that third-quarter profit more than tripled to $3.19 billion from a year earlier on trading gains and investments with the firm's own money. Third- quarter earnings for JPMorgan (JPM), the second-biggest U.S. bank by assets, were $3.59 billion, the highest since the 2007 collapse of the subprime-mortgage market, the bank said Oct. 14.
In contrast, the economy has lost 7.3 million jobs since the recession began in December 2007, and businesses may shed another 125,000 in November, according to economists surveyed by Bloomberg News. The unemployment rate is forecast to match October's 26-year high of 10.2 percent.
The Fed chairman is overhauling the way the Fed conducts bank inspections, reinforcing individual bank examiners with modeling by Fed Board staff designed to identify risks across the financial system.
"Heeding the lessons of the crisis, we are committed to taking a more proactive and comprehensive approach to oversight to ensure that emerging problems are identified early and met with prompt and effective supervisory responses," he said.