WASHINGTON, Feb 26 (Reuters) - Below are highlights from Federal Reserve Chairman Ben Bernanke's prepared testimony on Tuesday on monetary policy and the U.S. economy to the Senate Banking Committee.
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ON POTENTIAL COST OF QUANTITATIVE EASING:
"We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation."
ON SEQUESTRATION CUTS TO TAKE EFFECT ON MARCH 1:
"To address both near - and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantiality in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget."
FISCAL POLICY EFFORTS TO PROMOTE ECONOMIC RECOVERY:
"A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO (Congressional Budget Office) estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to automatic spending sequestration that is scheduled to begin on March 1, which, according to CBO's estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year."
BENEFITS OF ASSET PURCHASES:
"In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear: Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC's 2 percent objective. Notably, keeping longer term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods."
COSTS OF HIGH UNEMPLOYMENT:
"High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole.
"The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending, thereby leading to larger deficits and higher levels of debt."
GASOLINE PRICES AND INFLATION:
"The recent increase in gasoline prices, which reflects both higher crude oil prices and wider refining margins, is hitting family budgets. However, overall inflation remains low."
LONGER-TERM INFLATION EXPECTATIONS:
"Measures of longer-term inflation expectations have remained in the narrow ranges seen over the past several years. Against this backdrop, the Federal Open Market Committee anticipates that inflation over the medium term likely will run at or below its 2 percent objective."