Bernanke Admits To Congress: We Are Printing Money, Just 'Not Literally' (2024)

In his semi-annual testimony before the House Committee on Financial Services, Fed Chairman Ben Bernanke was very clear about how the central bank engages in quantitative easing. We are printing money, just not literally, the Chairman told policymakers, while contradicting himself regarding recent record highs in stock markets, first attributing them both to the strength of the economy and the impacts of monetary policy. The market didn’t seem to care, rallying tepidly upon the release of the prepared remarks and remaining range-bound through most of the session.

“Where does the Fed get the money to buy [assets],” Congressman Keith Rothfus asked the Chairman. “Do you create the reserves,” he queried in a follow up, receiving a simple “yes” from Bernanke. And finally, the money shot: are you printing money? “Not literally,” the Fed Chairman surprisingly responded.

Bernanke had a relatively calm day on Capitol Hill after several weeks of increased volatility in the aftermath of his comments. While most policymakers appeared concerned with regulation, Fannie and Freddie, and too big to fail, a few ventured to ask the Chairman about the current state of monetary policy, its effects on the economy, and its future path.

Reiterating his recent statements, which were ambiguously read by investors, Ben Bernanke made it clear that tapering is still on track this year, given the FOMC’s forecast hasn’t changed, and that asset purchases are set to end at some point in mid-2014. He once again gave a nod to billionaire hedge fund manager David Tepper, acknowledging that financial markets were getting excessively leveraged, prompting his detailing of the probable path of QE in coming months, and the FOMC’s intention to begin to draw it down.

Where Bernanke completely flip-flopped, and did so constantly, was with the recent rise in interest rates. Asked by Colorado Congressman Ed Perlmutter why rates had surged from April to June, Bernanke pointed to improving economic conditions, along with the unwinding of risky speculative positions.

A few minutes later, retorting to Stephen Fincher of Tennessee, Bernanke said the reason rates are low is “that the economy is weak and inflation is low.”

Bernanke engaged in the same sort of contradictions when asked to explain recent strength in equity markets, as stocks have once again hit and remained at or near record highs since the Chairman’s previous public appearance. Shown a chart of the growth in the Fed’s balance sheet and its correlation with the S&P 500 by South Carolina’s Mick Mulvaney who called the market “addicted,” Bernanke first rejected that notion (“I don’t know what it means that markets are addicted”), only to add that stock market highs reflected the strength of the underlying economy.

Why do we still need easy money if the economy is improving, Mulvany then asked, to which Bernanke first explained that profits had gotten ahead of jobs, only to add that if the Fed reduces its accommodation, the economy would tank.

Bernanke also spoke of Wall Street, which he said isn’t reaping greater benefits from QE and lower rates than Main Street, and said major institutions appear prepared for a sharp rise in interest rates. In the past, commentators like Peter Schiff have warned that major financial institutions like Bank of America, JPMorgan Chase, and Citigroup could suffer tremendous losses on their Treasury holdings if rates surge.

Having had lost control of the markets, Bernanke did a good job on Wednesday at waiting for Godot (i.e. saying a lot without saying much). While he did reveal some interesting things as to how he conceives monetary policy and the state of the economy, the Chairman managed to minimize the impact of his Congressional testimony to the point where market watchers essentially stopped paying attention. The yield on 10-year Treasuries, which dropped sharply into the open, very slowly trended up through the trading session, while gold remained range-bound after the initial remarks.

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