Bernanke Talks Recovery as Congress Plays Politics

NEW YORK ( TheStreet) -- Discussion between Federal Reserve Chairman Ben Bernanke and Congress on Wednesday displayed two different conversations.

Simply stated, House members' questions were political while Bernanke's answers were about monetary policy, and how to pull the world's largest economy out of its worst crisis since the 1930s.

Rep. Bill Foster (D., Ill.) asked Bernanke about immigration reform. Bernanke said the Fed had not looked extensively into the effects immigration reform might have on monetary policy.

Rep. Steve Stivers (R., Ohio) asked about bank regulations for community banks, and Bernanke said small financial institutions would not be exempt from the guidelines ostensibly followed by larger banks.

Many others questioned the possibility of hyper-inflation (Tuesday's June CPI report showed core inflation actually dipped from the prior month), unwinding the Fed's balance sheet (the Fed has outlined the prospect of tapering in 2013 and possibly ending monetary stimulus in 2014, but has reiterated it would not immediately unwind the positions) and the national debt.

Audiences may be uncertain as to why politicians on Wednesday asked many questions that don't pertain to monetary policy, or that the Fed chairman has already answered or that the central bank and masses of analysts and economists have addressed.

The point here is that members on the House Financial Services Committee are answering to constituents in their voting districts. Immigration reform right now is a huge political issue in Washington D.C. that has major implications on the economy and the 2014 midterm election. Local savers rely on community banks' operations, which are affected by government regulations set by lawmakers.

It's easier to understand this issue if we observe how a Republican and Democrats on the committee approached Bernanke's hearing.

Committee Chairman Rep. Jeb Hensarling's (R., Texas) district in Dallas tends to vote for Republicans (George W. Bush won the district in 2000 and 2004; John McCain won it in 2008), and residents there haven't voted for a Democratic representative in the district since the mid 1990s. The general stance among the Republican caucus in the House is that the Fed has overstepped its power, and is inflating the monetary base too much. This isn't to say everyone in Texas's fifth congressional district agree with House Republicans, but a majority of constituents there have voted for this thinking.

Hensarling took his jabs, saying he felt the "stagnant" growth of the economy in recent years was correlated to the Fed's actions. Though Bernanke pointed out that the Fed is independent of the federal government's direction, many voters still think of them as operating in tandem. So, when Hensarling canvases his district in 2014 and voters press him about government expansion, he can show (among other situations) that he opposed Bernanke and the Fed's current policies.

Rep. Maxine Waters (D., Calif.), the ranking Democrat on the committee, led with her praise of how Bernanke and the Fed have softened fallout from the financial crisis. Generally, Democrats in the House don't spend a lot of time offering great approval of the central bank's actions, but they are a bit less antagonistic when broaching the subject. Stability since the 2008 financial collapse, a slowly improving labor market, a revived housing market and the avoidance of an economic depression can link back to Fed monetary action that started during the crisis.

Democrats have enjoyed much political success since those policies launched at the very end of the Bush administration: Barack Obama won the White House in 2008 and grabbed reelection in 2012; Democrats won a supermajority in the Senate and retained the House in 2008, and retained power in the Senate in 2010 and 2012. Despite losing the House in 2010, Democrats have held on to great power amid the huge economic struggles of the past five years.

Bernanke stuck to script on Wednesday (he's been through enough of these hearings to understand the motivations of the politicians and he largely avoided the politics) and reiterated much of what the market already expected.

Below are a few major points the Fed chairman made in his prepared testimony.

Bernanke said the pace of the Fed's bond purchases are not on a pre-set course, and that the Fed may begin to taper its monetary stimulus in 2013 and possibly end in 2014.

Additionally, Bernanke's testimony said the labor market is improving gradually, but that it is far from satisfactory. Bernanke said that risks to the economy have eased since the fall of 2012.

The Fed will retain on its balance sheet the mortgage-backed securities and longer-term Treasuries purchased in its quantitative easing programs even after the bank ends stimulus. Bernanke will not give a hard date as to when the Fed expects to unwind its position in those assets.

-- Written by Joe Deaux in New York.

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