Federal Reserve Board Chairman Ben Bernanke reassured Congress Wednesday that the Fed has no plans to raise its interest rates any time soon.

“The federal funds rate is likely to remain exceptionally low for an extended period,” Bernanke told the House Financial Services Committee.

Last week’s decision to raise the discount rate charged to banks who tap the Fed for short-term credit was a result of improvements in private-sector sources for such financing, Bernanke said. It should not “lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy,” he said.

That reassurance came as a relief to Wall Street, where stocks advanced on the news, and to most members of Congress.

The Fed expects the economy to recover at a moderate pace, with higher-than-average unemployment rates through the end of 2012.

“Obviously, unemployment is the biggest problem we have,” Bernanke said.

“Unfortunately,” he added, “there is no silver bullet here.”

Bernanke declined to say what, if any, steps Congress should take to get more Americans working. When asked about lending to small businesses, who created most of the new jobs during past economic recoveries, Bernanke said the Fed and other bank regulators have been urging banks to lend to creditworthy borrowers and are telling bank examiners not to look askance at such loans.

“We’re very focused on that issue,” Bernanke said.

“It’s simply not getting through,” responded Rep. Don Manzullo, R-Ill., who said manufacturers in his heavily industrialized district can’t get loans even though they have orders in hand from customers.

Bernanke also noted that bank regulators also have issued guidance on commercial real estate loans, “probably the biggest credit issue we still have.”

“There are a lot of troubled commercial real estate properties, and they’re causing problems for a lot of banks,” he said.

Regulators have told banks that these loans should not be marked down -- if borrowers are current on their payments -- just because the value of the property has declined, he said. There have been “a few rays of light” in the commercial real estate financing market, he said, but a real recovery for this sector depends on a stronger economy bringing down vacancy rates for office buildings, retail centers and other commercial buildings.

Bernanke also told members of Congress that they and President Barack Obama need to show financial markets they have “some kind of plan” for bringing the federal government’s own finances “back to a sustainable position.” Failing to do so not only would lead to higher interest rates in the future, but could also cause interest rates to rise in the near term if bond markets become worried about the federal government’s future stability.

The oddest moment of the hearing came courtesy of Rep. Ron Paul, R-Texas. Paul, a harsh Fed critic, asked Bernanke about reports that the Fed made a loan to Iraq dictator Saddam Hussein in the 1980s, and helped finance Watergate scandal conspirators in the 1970s.

“The specific allegations you’ve made are absolutely bizarre,” Bernanke told Paul.

Kent Hoover
Puget Sound Business Journal