Bernanke Warns on Europe in Congressional Testimony

Federal Reserve Chairman Ben Bernanke warned that the ongoing sovereign debt crisis in Europe “could worsen economic prospects” for the U.S. in his testimony to Congress on Thursday.

Speaking before the Committee on the Budget at the U.S. House of Representatives, Bernanke largely reiterated the Fed’s stance at last month’s FOMC meeting – namely that the U.S. economy is growing at only a modest pace and continues to face headwinds from challenging labor and housing markets.

Highlights from the Fed Chairman’s testimony included:

Over the past few months, indicators of spending, production, and job market activity have shown some signs of improvement; and, in economic projections just released, Federal Open Market Committee (FOMC) participants indicated that they expect somewhat stronger growth this year than in 2011. The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.

Globally, economic activity appears to be slowing, restrained in part by spillovers from fiscal and financial developments in Europe. The combination of high debt levels and weak growth prospects in a number of European countries has raised significant concerns about their fiscal situations, leading to substantial increases in sovereign borrowing costs, concerns about the health of European banks, and associated reductions in confidence and the availability of credit in the euro area.

The FOMC stated its collective view that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate; and it indicated that the central tendency of FOMC participants’ current estimates of the longer-run normal rate of unemployment is between 5.2 and 6.0 percent.

Bernanke also commented on the the “fiscal policy challenges” that the U.S. faces.  While he began by stating that he would like to “briefly” discuss the matter, the transcript of his testimony showed that he spent nearly as much time discussing fiscal policy as monetary policy.  However, that is the least of the Chairman’s gaffes.

More importantly, it is critical to note that the Federal Reserve does not have a legal mandate to engage in fiscal policy. Nonetheless, Bernanke and his fellow central bankers violated this law by buying other securities outside of U.S. Treasuries as part of its quantitative easing program, as Dr. John Hussman has explained on several occasions.