Fed Chief Bernanke Heads to Washington Again

February 26, 2009 10:00AM ET

(bettertrades) - Federal Reserve Chairman Ben Bernanke addressed Congress on Tuesday, affirming his position that the central bank’s primary objective is to restore stability. Bank stocks ticked higher in the wake of the Fed Chief’s opening statements.

Here is an excerpt of the prepared speech delivered by Chairman Bernanke:

As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit. In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years.

His testimony before Congress touched on several major points including:

• The Federal Reserve’s actions and commitments to repair broken confidence in financial markets
• The dire need to reduce the current account deficit over time
• An attempt to balance the budget this year is not a reasonable goal
• Homeowners reduced savings as home prices rose
• Fed’s objective to restore stability is essential to a recovery

A day after President Obama announced his intention to cut the deficit in half, Chairman Bernanke stressed the need to reduce the current account deficit as a long-term goal. The current account is the difference between aggregate exports and imports, ex-investments. The U.S. capital account has been exploding as foreign inflows have been needed to finance consumption of imported goods.

Bernanke directly addressed the need for a greater savings rate to help combat the current account deficit. He noted that as home prices rose during the late 1990’s/early 2000’s, homeowners lacked an incentive for personal savings.

Bernanke also addressed the central bank’s bloated balance sheet, citing the majority of assets held at the Fed being short-term loans that will expire naturally as economic conditions improve.

In the end, Bernanke affirmed what he believes the Federal Reserve’s primary objective is: to restore stability to the financial system through expansive monetary policy.