Bernanke's Senate Banking Committee Testimony (Part 2)

* Bernanke: Inflation to remain near target as oil prices drop

* Bernanke: Mistake to let policy influence policy decisions; central bank is already transparent, accountable to public; idea of giving politicians influence over monetary policy choices 'is very concerning'

* Bernanke reiterates US Fiscal situation is Unsustainable; sees need for credible on fiscal stability that involves 'gradual approach' takes into account longer term considerations, fragility of recovery; fiscal cliff would damage recovery

* Bernanke: Fed actions not leading to higher inflation so far

* Bernanke calls high unemployment rate for Blacks 'Tragedy'; says this may be due to education, discrimination factors; not something monetary policy can address; can only hope to lower overall unemployment and that 'rising tide lifts all ships'

* Bernanke says doesn't expect double dip recession in the US; says Fed sees continued moderate growth; still recovery is slower than Fed would like

* Bernanke says Fed's QE efforts have had 'productive effects' yet monetary policy is not 'panacea'; Fed still may be able to provide some incentives by lowering interest rates, improving asset prices

* Bernanke: Banks manipulating market should be held accountable

* Bernanke: Fed not 'enforcement agency'; others looking into possible actions in Barclays case

Note: Regulators are now looking into possible Libor rate manipulation by Credit Agricole, Deutsche Bank, HSBC and Societe Generale

* Bernanke says Europe not close to having long-term solution; financial market volatility will continue until Europe has long-term solution

* Bernanke says his 'nightmare scenario' would be having Congressional lawmaker seek independant opinion from GAO in event future Fed chairman wants to raise rates; such effect would have 'chilling effect,' prevent Fed from operating in apolitical way

* Bernanke: Fed will be able to take away Punch Bowl and reverse policies when time comes

* Bernanke says 'certainly possible' Fed will take more action; Fed assessing whether slowdown is temporary, would take action if no progress made toward higher levels of employment; recovery has decelerated recently

* Bernanke says pretty clear high GDP-debt ratio level impedes growth; Bernanke declines to comment on money-multiplier effects of various Congressional actions, ranging from expanding safety net to tax cuts for middle class/wealthy; commenting would come close to advocate one approach to another

* Bernanke says problems with Libor structure; one possible solution is to switch to market based indicator

* Bernanke: No single solution for revibing housing market; policy has helped growth; Europe facing lots of headwinds, faces difficult situation

* Bernanke: costs of high unemployment 'are very very high'; unemployment leads to wasted resources, long-term joblessness may impact economy for long time

* Bernanke: Fed action has helped the economy

* Bernanke: Letting fiscal cliff occur would be unproductive; if Congress let's fiscal cliff occur, higher taxes/less spending will slow economy; Bond market indicates concern that Congress doesn't plan to address cliff at all

* Bernanke: Many parts of the economy have improved since 2009; economy still not where Fed would like; auto manufacturing/banking appear to be doing better; 'good but' of unemployment still cyclical; can be addressed by Fed policies; structural element may be rising

* Bernanke: Fed policy still has 'some capacity' before reaching its limit; limit will be reached at some point

* Bernanke: Higher inflation doesn't have lot of Fed support; Fed's target is at 2%

Market Reaction/Analysis

* OSK: Bernanke's somber tone
leaves more Fed actions on the table; FOMC seen as extending low rate guidance from late 2014 to mid-2015 in Aug 1 policy decision; if July 27 GDP report comes in notably weaker than expected, FOMC likely to start balance sheet expansion; QE3 could be undertaken in form of either exclusive purchases of MBS between $300-$500 billion or combined purchases of $300 billion in MBS/$200-$300 billion in long term Treasuries; otherwise might defer QE3 if needed until later meeting; reducing interest on excess reserves is least appealing option partly because it doesn't necessarily boost bank lending

* Capital Economics: Fed could start US version of BOE's new Funding for Lending Scheme, designed to boost volume of bank loans; Fed can't replicate design of BOE program exactly because its in process of selling of last of treasury holdings with maturities of less than 3 years. That's why Bernanke suggested discount-window lending instead; to make discount-window lending appealing to US banks, Fed would need to cut penalty rate and/or extend duration of loans

* Blue Phoenix Financials: The US Congress after Bernanke's Testimony, must be deemed deaf, dumb and blind if it does not understand, realise and act on Bernanke's report which is clearly telling Congress that the structural issues of the economy must be tackled urgently to improve employment and the budget deficit. Bernanke has been saying this all the time and the American bureucrats are ignoring what they need to hear and act on. The introduction of further Operation Twists and other tools are only short-term solutions and does not solve the main problem and that is the budget deficit needs to be reduced and the rich should be paying higher taxes and US corporate taxes should be reduced so that companies can repatriate funds and create new jobs. There is no short cut to 'pain' which has to be induced gradually to bring about a long term 'cure.