Bernanke defends low rates in House hearing

                   The policy is needed “to keep interest rates a little bit lower to help support housing, automobiles and other parts of the economy that need support,” Bernanke said during his second day of his testimony to Congress on the economy and monetary policy.

Investors were pleased with Bernanke’s stance. The Dow Jones Industrial Average rose to its highest levels in the late afternoon, up almost 200 points to 14,098.Read Market Snapshot.

In January, the Fed decided to keep buying $85 billion worth of Treasury bonds and mortgage-backed securities a month until it saw a substantial improvement in the labor market. The Fed has also kept interest rates close to zero since December 2008.

For the second day, Bernanke strongly defended the bond-buying program and repeating that the potential costs don't outweigh the benefits. Read about first day’s testimony.

Some Fed officials are worried that the program will create financial instability and could foster inflation if the central bank has difficulty engineering a smooth exit strategy.

The Fed will review its bond-buying program at its next meeting on March 19-20.

Bernanke said results of the easy policy stance are starting to emerge.

“We are getting some traction in the housing market, which has shown some strength in the last few days, some of the data most recently. In automobiles and other durable goods, to some extent in investment, to some extent, perhaps, in commercial real estate we’ve seen some signs of improvement,” Bernanke said.

Republicans on the House panel were skeptical.

“There seems to be…a lot of evidence out there that the benefits of the low interest rate and quantitative easing are accruing primarily to the federal government, foreign governments and large banks,” said Rep. John Campbell, a Republican from California.

A common theme among Republicans was that Bernanke was “enabling” runaway spending by the federal government.

Jan Hatzius, chief economist at Goldman Sachs, noted that Bernanke sent a “modestly dovish signal” by suggesting the Fed is debating holding the securities on its balance sheet longer than currently expected or letting them run off without selling.

“Our estimates suggest that the effects on long-term interest rates of such a move would be modest,” he said.

Bernanke repeated his call for Congress and the White House to agree to take steps so the economy could avoid the impact of the across-the-board federal spending cuts, known as the sequester.

The cuts are set to start to take effect Friday.

“Most economists…would say that [the sequester] would cost a lot of jobs in the short-run and you can achieve the same results with longer-term programs,” the Fed chairman said.

“Would it be fair for me to paraphrase this to average people that the chairman of the Federal Reserve thinks that sequestration is stupid? asked Rep. Michael Capuano. a Democrat from Massachusetts.

“I wish you wouldn’t do that,” Bernanke replied.

Asked if low rates were punishing seniors, Bernanke said that raising rates prematurely would only hurt the economy.

“It’s very striking that if you look at every other industrial country around the world, interest rates are about exactly where they are here,” the chairman said.

“And that says something about the fundamentals, which are very weak in most of these industrial countries. And until we can get greater forward momentum, we’re not going to be able to see sustainable higher returns,” he added.

Courtesy : Market Watch