The following are highlights from a U.S. Senate Budget Committee hearing on Friday with testimony from Federal Reserve Chairman Ben Bernanke.

BERNANKE ON CHINA RESTRICTING RARE EARTH MINERALS EXPORTS:

So within the rules that China has agreed to, the WTO process looks like it's been working ...

The president of China is going to be here in a few days and I hope there will be an opportunity for high-level discussion. But this is part of the ongoing process that we have had with China for a while ... It's been a struggle.

COMMITTEE CHAIRMAN KENT CONRAD ON FINANCIAL SITUATION OF STATES:

I think it's something this committee is going to have to be prepared with an answer and what you're saying makes eminent good sense, that is maybe there are ways (to) help with creative financing. I don't think there's going to be much appetite here for sending truckloads of money to states.

BERNANKE ON FINANCES OF STATES:

They should not expect loans from the Fed. The numbers that the chairman referred to are prospective, they're a measure of how much spending cuts or tax increases are going to be needed to achieve balance. It's going to be difficult but on the other hand there is some improvement in the economy and tax revenues actually have picked up.

BERNANKE ON CHINA'S FOREIGN EXCHANGE POLICY:

It is true that to the extent that China or other countries undervalue their exchange rate or maintain a fixed exchange rate, they import U.S. monetary policy -- a U.S. monetary policy in my view which is quite accommodative and appropriate to the United States is not particularly appropriate to China given how quickly they're growing. ... So in fact it is forcing them to take some actions. Letting their exchange rate appreciate somewhat would be helpful for them in this context because it would reduce the inflation pressures that they're otherwise going to experience.

BERNANKE ON RISKS OF DEFAULTS BY CITIES:

Clearly the large cities are under a lot of financial stress. It's something that we need to pay attention to because it would have spillover effects in other markets. But we don't at this point see anything of that magnitude happening.

That being said, I think cities and municipalities will need to take strong measures to avoid defaults. Default is only at best a short-term solution for local governments because what they find is that it would be very difficult to get back into the market and they'll have to pay a higher interest rate so it would be much in their interest to take the difficult measures to avoid default. As I said earlier, while there's no question there's a lot of stress on state and local governments, at this point the municipal market seems to be operating fairly normally but we'll watch that very, very carefully.

BERNANKE ON PRESSURE FOR STATES AS FEDERAL AID WINDS DOWN:

No question state and local governments are under a lot of pressure, they have been cutting spending and employment over the last couple of years. The federal assistance will continue in 2011, but after 2011 it is going to be pretty much zeroed out, I think, so on the one hand the states are seeing some improvement in tax revenues as there has been some growth, but on the other hand they are going to be losing some of the federal assistance, so the pressures on state budgets and local municipal budgets are going to continue for a while and that is going to be a headwind for the overall economy as well as for the individual states.

China Ben Bernanke Federal reserve