ben s bernanke : economic outlook and recent monetary policy actions testimony by mr ben s bernanke, chairman of the board of governors of the federal reserve system, before the joint economic committee, us congress, washington dc, 4 october 2011. * * * chairman casey, vice chairman brady, and other members of the committee, i appreciate this opportunity to discuss the economic outlook and recent monetary policy actions. it has been three years since the beginning of the most intense phase of the financial crisis in the late summer and fall of 2008, and more than two years since the economic recovery began in june 2009. there have been some positive developments : the functioning of financial markets and the banking system in the united states has improved significantly. manufacturing production in the united states has risen nearly 15 percent since its trough, driven substantially by growth in exports ; indeed, the u. s. trade deficit has been notably lower recently than it was before the crisis, reflecting in part the improved competitiveness of u. s. goods and services. business investment in equipment and software has continued to expand, and productivity gains in some industries have been impressive. nevertheless, it is clear that, overall, the recovery from the crisis has been much less robust than we had hoped. recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated ; indeed, by the second quarter of this year – the latest quarter for which official estimates are available – aggregate output in the united states still had not returned to the level that it had attained before the crisis. slow economic growth has in turn led to slow rates of increase in jobs and household incomes. the pattern of sluggish growth was particularly evident in the first half of this year, with real gross domestic product ( gdp ) estimated to have increased at an average annual rate of less than 1 percent. some of this weakness can be attributed to temporary factors. notably, earlier this year, political unrest in the middle east and north africa, strong growth in emerging market economies, and other developments contributed to significant increases in the prices of oil and other commodities, which damped consumer purchasing power and spending ; and the disaster in japan disrupted global supply chains and production, particularly in the automobile industry. with commodity prices having come off their highs and manufacturers ’ problems with supply chains well along toward resolution, growth in the second half of the year seems likely to be more rapid than in the first half. however, the incoming data suggest that other,

35 per cent of households owe money on their home. if we include debts of all kind, closer to 70 per cent of households carry debt of some kind, though many of these other debts are relatively small. differentials between countries do matter to exchange rates, along with expectations about how those differentials may change ( a function of growth expectations ), factors affecting trade positions ( such as commodity prices in our case ), investor risk preferences and so on. i have already discussed the case of petrol, but there is surely little doubt that the prices of tradable goods and services generally are lower today than they would have been if the exchange rate had been at its long run average level. this is the case even with much more muted short term pass through of exchange rate changes than we used to have. in other words, changes in the exchange rate alter the terms at which the rest of the world supplies goods and services to australia in a way that is stabilising for prices. all these are channels for monetary policy ’ s effects. they operate at different speeds, and to differing extents in different episodes – but they are all there, and i would say that they are all working at present. the transmission of monetary policy is not just about home loan rates, as important a channel as that is. secondly, to say monetary policy is a blunt instrument begs the question : where are the sharp instruments? it is not obvious that there are all that many. people mention supply side reforms of various kinds and unquestionably these have been extremely important over the years. to the extent that more can be done, that is all to the good for australians ’ standard of living. but they are long term. it is hard to deploy them in a hurry. and many of them are very general – “ blunt ” even – rather than specific. many people will appeal, perhaps not unreasonably, to the possibility of using fiscal policy to counter inflation pressure. for some time now, fiscal policy has not been actively deployed to manage the business cycle. the focus has mainly been on achieving and then maintaining a structurally sound, long run fiscal position and, subject to that, making tax and spending decisions aimed at various other objectives that governments have. this does not preclude allowing the budget ’ s “ automatic stabilisers ” to operate over the cycle ( though it might be observed that, with an elongated upswing like the one we have been having, it is getting more difficult to decide