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Bernanke: Higher Interest Rates Reflect Improved Economy

Thursday, 13 Jan 2011 02:49 PM

Federal Reserve Chairman Ben Bernanke said increased interest rates since the central bank expanded record monetary stimulus reflect an improved economic outlook, not a failure in the Fed’s program of buying bonds.

“Interest rates are higher, but I think that’s mostly because the news is better,” Bernanke said today at a forum in Arlington, Virginia, hosted by the Federal Deposit Insurance Corp. “It’s responding to a stronger economy and better expectations. So I think that the policy has helped.”

Yields on 10-year Treasurys have risen to 3.31 percent today from 2.57 percent on Nov. 3, when the Fed approved buying $600 billion of Treasurys in a move criticized by Republican lawmakers and some foreign governments. Bernanke said he’s more optimistic for a pickup in U.S. growth this year that may boost credit to small businesses, as well as their sales.

“We see the economy strengthening,” Bernanke said as part of a panel discussion on boosting lending to small businesses. “It looks better in the last few months. We think that a 3 to 4 percent-type of growth number for 2011 seems reasonable.”

“Now you’re not going to reduce unemployment at the pace that we’d like it to,” Bernanke said. “But certainly it would be good to see the economy growing. That means more sales, more business for companies of all sizes.”

Treasurys extended gains after Bernanke said joblessness may not fall as quickly as Fed officials would like. The 10-year Treasury yield declined to 3.31 percent from 3.37 percent. Stocks extended their drop, with the Standard & Poor’s 500 Index falling 0.2 percent to 1,283.91 at 2:32 p.m. in New York. The dollar remained lower against the euro.

Weak Flow

Bernanke and his Fed colleagues are trying to determine the reasons for a weak flow of credit to small companies and to identify ways other than continued record monetary stimulus to reduce an unemployment rate close to a 26-year high.

“If the sales come, that will make these businesses stronger, make them more creditworthy and be a virtuous circle,” Bernanke said on a panel that included FDIC Chairman Sheila Bair and Senator Mark Warner, a Democrat from Virginia.

Fed officials last year joined more than 40 meetings around the U.S. with small businesses, lenders, bank examiners and local government officials. Bernanke said in a Jan. 7 Senate hearing that “we are working very hard in our role as a regulator to try to improve the availability of credit to small businesses and to other borrowers.” He said the issue was “our top priority.”

Bernanke, in the hearing, attributed the decline in credit to bank losses and lower values of collateral. He said the Fed won’t criticize a bank for lending to a small business or a company where the collateral value has dropped.

More Lending

As the economy expands “we’re going to see more lending take place,” Bernanke said on Jan. 7.

Yesterday the Fed said in its anecdotal Beige Book report that holiday-season spending and increased manufacturing drove an economic expansion across the U.S. in November and December, with businesses cautiously optimistic about their 2011 outlooks.

Since the last meeting of Fed policy makers on Dec. 14, indicators have been “somewhat stronger,” and the “holiday season seemed to be particularly strong” across large and small businesses, St. Louis Fed President James Bullard said yesterday in a telephone interview.

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Federal Reserve Chairman Ben Bernanke said increased interest rates since the central bank expanded record monetary stimulus reflect an improved economic outlook, not a failure in the Fed s program of buying bonds. Interest rates are higher, but I think that s mostly...
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