Bernanke: Longer-Term Rates `Relatively Low'

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July 18 (Bloomberg) -- Federal Reserve Chairman Ben Bernanke explains to the Senate Banking Committee the reasons why long-term interest rates have begun to rise. (Source: Bloomberg)

Start taking questions from tim johnson, the democratic senator from south dakota.

As always, there will be issues of judgment there that are unavoidable in any monetary policy normalization.

That being said, we have laid out essentially a three stage process for our normalization.

The first, which is dependent upon the economy strengthening, the labor contingent -- labor market continuing to normalize.

A process of slowing, moderating the pace of our asset purchases and eventually bringing those 20 additional purchases -- to zero additional purchases at the point that we can say we have made substantial improvement in the labor market.

We have given guidelines about how that process would go forward.

The second stage would be a potentially lengthy period in which we are watching the economy for continued improvement, continued reduction in unemployment , normalization of inflation.

I described in my testimony, when unemployment gets to 6.5% and normalization is looking closer to target, we would consider whether tightening in the form of raising short-term interest rates is appropriate.

That would be the second stage.

The final stage, the ultimate normalization of policy, raising up short-term interest rates and normalization of our balance sheet.

As i noted in my testimony, assuming that the economy remains in a slow growth mode as we have been seeing, that process will be a very gradual process.

What explains the recent rise in long-term interest rates and how much more of an increase in rates could cause recovery to falter, and what would the federal reserve do to respond if interest rates spike?

There are three reasons why we have seen increase in long- term rates, though i would emphasize they remain relatively low.

The first is that there has been some better economic news as investors see brighter prospects ahead.

Interest rates tend to rise.

We saw a good labor market report which was accompanied by a sharp increase in interest rates on that day.

Second reason for that interest -- increase in rates is the unwinding of leveraged and perhaps successfully risky positions in the market.

It's probably a good thing to have that happen, although the tightening associated with that is unwelcome.

At least the benefit of it is, some concerns about building financial risks are mitigated in that way and probably make some participants more comfortable with using this tool going forward.

The third reason has to do with federal reserve communications and market interpretations of fed policy.

We have tried to be very clear from the beginning, and i have reiterated again today that we have not changed policy, we are not talking about tightening monetary policy.

We are trying to layout the same sequence i just described about how we're going to move going forward and how that would be tied to the economy, but i want to emphasize that monetary policy will be tighter at any point in the future.

What do you see as a bigger threat to the housing market recovery as we continue housing finance performance?

We have to keep our eyes open to pay attention to mortgage rates and affordability.

I think it's very important for us to get our housing institutions, regulatory structure to get those cleared up, get those in working order.

I'm glad to see that congress is now looking at reforms of fannie and freddie, the mortgage securitization system.

We still have rules to go about skin in the game and other aspects of mortgage market.

I think as we get greater clarity that we will see less tightness in the market for mortgages for first-time homebuyers and people with less than perfect credit scores.

One of the risks we face now is that there is still a pretty significant part of the population that is having considerable difficulty accessing mortgage credit, even though they may have the financial wherewithal to be worthy of that credit.

This text has been automatically generated. It may not be 100% accurate.

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