Stocks reacted poorly after Ben Bernanke, the Chairman of the Federal Reserve, was pushed by members of Congress, including Ron Paul (R-TX) and Thaddeus McCotter (R-MI), to explain current federal monetary policy
“In terms of the credit still not getting to potential borrowers,” Rep. McCotter said in reference to Bernanke’s testimony and written remarks, “what, specifically, do you think the reason for that is? And what do you think could specifically be done about it (if not by you)?”
Rep. McCotter continued:
Just a question about how this operates…it says here on page 6, “the target range for the federal funds rate remains at zero to a quarter percent.” Now, when that type of rate remains in effect, does that have an effect on the personal savings interest rates that individuals who bank get and, if that is the case and that, somehow that, let’s say, stopped them from getting a higher rate of return, would that not constitute them essentially subsidizing the operations to try to get money to, say, the banks or to other people who are still not giving the credit?
“Well,” Bernanke responded, “on the latter point, we are certainly paying attention to the effects of low interest rates, not only on savers, but on other financial institutions and the like.”
The banks complain about the low interest rates. They say that that reduces their net interest margin so it’s not a “profitable” thing from their perspective. I would say from the point of view of savers though, for most savers, I think (on average) something less than 10 percent of all savings by retirees is in the form of fixed interest instruments like CDs.
Remember, people also own equities, they own money market funds, they own mutual funds, they have 401ks, and a variety of things. And those assets are assets whose returns depends very much on how strong the economy is. And so, in trying to strengthen the economy, we are actually helping savers by making the returns higher as we can see as its happening in the stock market for example.
Watch Rep.Thaddeus McCotter question Bernanke on how monetary policy has affected inflation, saving, the health of the economy, and the stock market:
The Dow, which had been up by as many as 51 points, reversed course as Bernanke started speaking. It turned negative within the hour. The current market losses are broad, with nine of the 10 industry groups in the S&P 500 losing ground. Materials and energy stocks had the sharpest declines, while consumer products and financial companies were nearly flat.
The price of gold was virtually unchanged until 10 a.m., just as Bernanke started speaking, then fell more than $70 an ounce. It recovered some of its losses and was down about $50 an ounce at $1,738.
Rep. Ron Paul, who has long been a vocal opponent of the Fed's monetary policy, questioned Bernanke on the dangers involved with printing more money, namely, inflation.
“In January, at one of your press conferences, you sort of poked a little bit of fun at people to downplay the ‘two percent’ inflation rate," Rep. Paul said to Bernanke.
"But if you say it’s two and I say it’s nine, let’s compromise for the sake of argument that it’s five percent. Then you said that ‘it doesn’t hurt you unless you’re one of those people who stick their money in the mattress.’ But where are you going to put it?” Rep. Paul asked.
“Are you going to put it in a CD and not make any money at all? This doesn’t make any sense. It doesn’t encourage any savings and it just discourages people,” he added.
Watch Rep. Paul explain to Bernanke his take on the real inflation rate and price increases (via Business Insider):
“Gas prices will add to inflation,” Bernanke said, “while unemployment is falling faster than expected.”
Bernanke went on to say that the job market is still "far from normal" and that more stimulus measures may be needed, according to a recent CNBC report. However, given the rest of Bernanke's testimony, many analysts believe further economic stimulus by the government is unlikely.
The Associated Press contributed to this report.