Highlights: Bernanke's testimony to Senate Banking Committee

Reuters

WASHINGTON (Reuters) - The following are highlights from Federal Reserve Chairman Ben Bernanke's testimony to the Senate Banking Committee on Tuesday on the central bank's semi-annual report on U.S. monetary policy.

FROM QUESTION AND ANSWER SESSION:

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BERNANKE ON IMPACT ON YIELDS OF ENDING QE2:

"We learned in the first quarter of last year, when we ended our previous (easing) program, that the markets had anticipated that adequately and we didn't see any major impact on interest rates. And so I don't expect when the time comes for us to end the program that we'll see a big impact. I think it's really the total amount of holdings rather than the flow of new purchases that affects the level of interest rates."

BERNANKE ON HOW FED DECIDED ON $600 BILLION FOR QE2:

"We have tried through a number of methods to establish a correspondence between these purchases and what our normal interest rate policies would be.

"And a rule of thumb is that $150 to $200 billion in purchases seems to be roughly equivalent to a 25 basis point cut in the federal funds rate in terms of the simulative power for the economy.

"So $600 billion is roughly a 75 basis point cut in the policy rate in terms of its broad impact.

"Seventy-five basis points in normal times would be considered a very strong statement, a very powerful move, but not one outside the range of historical experience.

"It would be one taken, that would be at a period of concern, and then we would observe the effect. So that was roughly the analysis that we did."

BERNANKE ON GAS PRICES:

"My sense is that the increases that we've seen so far, while obviously a problem for a lot of people, do not yet pose a significant risk either to the recovery or to the maintenance of overall stable inflation. However, we'll just have to continue to watch and if we see any significant additional increases we'll obviously have to take that very seriously."

FROM PREPARED TEXT:

BERNANKE ON THE U.S. ECONOMY

"We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold ... The combination of rising household and business confidence, accommodative monetary policy, and improving credit conditions seems likely to lead to a somewhat more rapid pace of economic recovery in 2011 than we saw last year."

BERNANKE ON THE U.S. JOB MARKET

"We do see some grounds for optimism about the job market over the next few quarters, including notable declines in the unemployment rate in December and January, a drop in new claims for unemployment insurance and an improvement in firms' hiring plans. Even so, if the rate of economic growth remains moderate, as projected, it could be several years before the unemployment rate has returned to a more normal level ... Until we see a sustained period of stronger job creation, we cannot consider the recovery to be fully established."

BERNANKE ON INFLATION

"Although overall inflation is low, since summer we have seen significant increases in some highly visible prices, including those of gasoline and other commodities. Notably, in the past few weeks, concerns about unrest in the Middle East and North Africa and the possible effects on global oil supplies have led oil and gasoline prices to rise further ... The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation -- an outlook consistent with the projections of both FOMC participants and most private forecasters. That said, sustained rises in the prices of oil and other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability."

BERNANKE ON QE2

"My colleagues and I continue to regularly review the asset purchase program in light of incoming information, and we will adjust it as needed to promote the achievement of our mandate from the Congress of maximum employment and stable prices."

SENATE BANKING COMMITTEE CHAIRMAN JOHNSON ON FED'S DUAL MANDATE

"While some critics have been very vocal, even going so far as to call for an end to the Fed's dual mandate, I believe you should be commended for your work. As the economy continues to struggle to recover, we should be using every tool in the toolbox to create jobs and spur growth. Taking tools away from the Fed now is the wrong idea at the wrong time."

(Compiled by Reuters' Washington Fed reporting team)