On Wednesday, June 19, 2013 Ben Bernanke gave his scheduled press conference.
Below are Ben Bernanke’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript. These comments are excerpted from the “Transcript of Chairman Bernanke’s Press Conference“(preliminary)(pdf) of June 19, 2013, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2013” (pdf).
From Ben Bernanke’s opening comments:
The labor market has continued to improve, with gains in private payroll employment averaging about 200,000 jobs per month over the past six months. Job gains, along with the strengthening housing market, have in turn contributed to increases in consumer confidence and supported household spending. However, at 7.6 percent, the unemployment rate remains elevated, as do rates of underemployment and long-term unemployment. Overall, the Committee believes the downside risks to the outlook for the economy and the labor market have diminished since the fall, but we will continue to evaluate economic conditions and risks as they evolve.
Inflation has been running below the Committee’s longer-run objective of 2 percent for some time and has been a bit softer recently. The Committee believes that the recent softness partly reflects transitory factors; and, with longer-term inflation expectations remaining stable, the Committee expects inflation to move back toward its 2 percent longer-term objective over time. We will, however, be closely monitoring these developments as well.
Bernanke’s responses as indicated to the various questions:
JON HILSENRATH. Jon Hilsenrath from the Wall Street Journal. Mr Chairman, there’s an undercurrent of optimism in your forecast and your statement and the policy statement today, for instance, the unemployment rate forecast comes down to 6.5 percent to 6.8 percent next year. It’s the case that the Fed has overestimated the economy’s growth rate very often in the past during this recovery, so–and we’ve gone through a period in the first half of the year with pretty subdued growth. So I would like to hear you explain where this optimism comes from and how confident you are that these expectations are going to be met.
CHAIRMAN BERNANKE. Well, the fundamentals look a little better to us. In particular, the housing sector, which has been a drag on growth since the crisis is now, obviously, a support to growth. It’s not only creating construction jobs, but as house prices rise, increased household wealth supports consumption spending, consumer sentiment. State and local governments who have been a major drag are now coming to a position where they no longer have to lay off large numbers of workers. Generally speaking, financial conditions are improving. The main drag or the main headwind to growth this year is, as you know, is the federal fiscal policy, which the CBO estimates is something on the order of 1.5 percentage points of growth. And our judgment is that, you know, given that very heavy headwind, the fact that the economy is still moving ahead at least to moderate pace, is indicative that the underlying factors are improving. And so we’ll see how that evolves. Obviously, we haven’t seen the full effect yet of the fiscal policy changes, but we want to see how that evolves as we get through that fiscal impact. But we’re hopeful, as you can see from the individual projections–and again, these are individual projections, not an official forecast of the committee–we’ll be obviously very interested to see if the economy does pick up a bit and continue to reduce unemployment, as we anticipate. I think one thing that’s very important for me to say is that if you draw the conclusion that I’ve just said that our policies–that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion because our purchases are tied to what happens in the economy. And if the Federal Reserve makes the same error and we overestimate what’s happening, then our policies will adjust to that. We are not–we have no deterministic or fixed plan. Rather, our policies are going to depend on this scenario coming true. If it doesn’t come true, we’ll adjust our policies to that.
ALISTER BULL. Alister Bull from Reuters. Thank you, Mr. Chairman. Financial conditions have tightened in the last few weeks and bond yields have gone up and they’ve gone up again today. why do you think that is? And, could you talk a little bit about whether that rise in bond yields and interest–longer term interest rates could affect your economic outlook and particularly given the mortgage rates and now pack up about 4 percent if that could affect the recovery underway in a housing market?
CHAIRMAN BERNANKE. That’s good question. Yes, rates have come up some. That’s in part due to more optimism I think about the economy and in part due to perceptions of the Federal Reserve. The forecast–the projections that our participants submitted for this meeting of course were done last few days so they were done with full knowledge of what had happened to financial conditions. Rates have tightened some but, you know, other factors had been more positive, increasing house prices for example. I think as far as the housing market is concerned, we’re going to want to watch that but one important difference now is that people are more optimistic about housing. They expect house prices to continue to rise and we see that for example in a survey question in Michigan survey. And that, you know, compensates to some extent for a slightly higher mortgage rate. And in fact, in terms of monthly payments on an average house, the change in mortgage rates we’ve seen so far is not all that dramatic. So, yes, our forecast–our projections do factor that in and if interest rates go up for the right reasons, that is both optimism about the economy and an accurate assessment of monetary policy, that’s a good thing. That’s not a bad thing.
ROBIN HARDING. Robin Harding from the Financial Times. Mr. Chairman, you’ve always argued that it’s the stock of assets that the Federal Reserve holds which affects long-term interest rates. How do you reconcile that with a very sharp rise in real interest rates that we’ve seen in recent weeks? And do you think the market is correctly interpreting what you think is most likely to be the future path of the–for Federal Reserve’s stock of assets? Thank you.
CHAIRMAN BERNANKE. Well, we were a little puzzled by that. It was bigger than it could be explained I think by changes the ultimate stock of asset purchases within reasonable ranges. So I think we have to conclude that there are other factors at work as well including again, some optimism about the economy, maybe some uncertainty arising. So, I’m agreeing with you that seems larger than it can be explained by a changing view of monetary policy. It’s difficult to judge whether the markets are in sync or not. Generally speaking though, I think that what I’ve seen from analyst and market participants is not wildly different from what, you know, the committee is thinking and trying to–as I try it today, they communicate. I think the most important thing that I just want to convey again is that it’s important not to say this date, that date, this time, it’s important to understand that our policies are economic dependent and in particular if financial conditions move in a way, that make this economic scenario unlikely. For example, then that would be a reason for us to adjust our policy.
VICTORIA McGRANE. Victoria McGrane with Dow Jones Newswires. You in your statement for the press conference and then the policy statement acknowledge that inflation readings have been low. But you maintained that inflation expect–longer term inflation expectations have remained stable. But actually, certain bond market measures of these things have fallen in recent weeks. Is that of any concern and if not, why? What would you need to see for the committee to start being more concerned that longer term inflation expectations are in fact, falling?
CHAIRMAN BERNANKE. Well, this is something we watch very carefully. There are a number of, as mentioned in this statement, there are a number of transitory factors that may be contributing to the very low inflation rate. For example, the effects of the sequester and medical payments, the fact that non-market prices are extraordinarily low right now. So these are some things that we expect to reverse and we expect to see inflation come up a bit. But, first, on inflation expectations, it is true that the break evens from the inflation adjusted–inflation index bonds have come down. To this point, they still remain within the historical range that we’ve seen over the past few years. And moreover, other measures of inflation expectations be it forecast by professional forecasters, whether it’s survey measures from firms or households, those are all still pretty much in the same places they were.
Now that being said, and as I said in my opening remarks, we don’t take anything for granted. And one of the preconditions for the policy path that I described is that inflation begin at least gradually to return towards our 2 percent objective. If that doesn’t happen, we will obviously have to take some measures to address that. And we are certainly determined to keep inflation not only–we want to keep inflation near it’s objective not only avoiding inflation that’s too high, but we also want to avoid inflation that’s too low.
RYAN AVENT. Ryan Avent, The Economist.
CHAIRMAN BERNANKE. Hi.
RYAN AVENT. Mr. Chairman, I’m trying to sort of understand the view with relation to these inflation figures. I’m a little surprised at how I guess blasé the committee seems about them with the exception of President Bullard. Inflation looks remarkably low on both core and headline, PCE and CPI. Your projections have it at rising–the Core PC rising to at most 2 percent in 2015. You say that inflation expectations have remained sort of within the range that the Fed is traditionally comfortable with, but they have fallen by a good half percentage point. And as you know that when interest rates are stuck at the zero lower bound, a decline in inflation expectations where it translates into an increase in real rates. Why is the Fed not more concerned about this? It seems to me that earlier in the recovery, they were more concerned about declines and inflation like this. And wouldn’t you say that, even if you’re happy with the pace of labor market recovery, the other things equal, this sort of inflation performance suggest that you should be pushing harder on the accelerator.
CHAIRMAN BERNANKE. I don’t disagree with anything you said. I think low–inflation that’s too low is a problem. It increases the risk of deflation. It raises real interest rates. It means that debt deleveraging takes place more slowly. Now, there’s always issues about, you know, why is it low? And as I pointed out, there are a few reasons that are probably not that meaningful economically, for example, the temporary movement in medical prices, the temporary movements in non-market prices, things of that sort. I mean, after all the CPI is somewhat higher. And so, we expect inflation to come back up, that’s our forecast. But I don’t want–I think it’s entirely wrong to say we’re not concerned about it. We are concerned about it. We would like to get inflation up to our target, and that will be a factor in our thinking about the thresholds. It will be a factor in our thinking about asset purchases. And, you know, we’ve got a dual mandate, and it’s mass employment and price stability. And there’s a reason why we define price stability as a positive inflation rate, not zero, because we believe that in order to best maximize the mandate, we need to have enough inflation so that there is in fact, you know, some room for real interest rates to move. So, I don’t disagree with your basic argument.
KEVIN HALL. Thanks, Mr. Chairman, Kevin Hall with McClatchy Newspapers. Since you’ve referred to Mr. Hilsenrath, is he the real power behind the throne? That’s one of the questions we all have.
You had mentioned on several occasions now that quantitative easing is designed to kind of spur economic–drive down the yield, force more risk taking that flows to the economy. There had been debate a couple of years ago at the beginning of this about whether it was inflating commodity prices. Inflation as a whole is subdued, but oil prices are–anchored somewhere around $99–$93 to $99. We were told once we have domestic production–we have record production now–that there would be a signal to bring prices down. It hasn’t happened. Brazil has got people on the streets ’cause of inflation. To what degree do you think quantitative easing is actually inflating commodity prices, and have you been able to filter that out? And any thoughts on wage growth, and why that’s been so flat when everything else seems to be doing good in the economy?
CHAIRMAN BERNANKE. Well, when we–as I recall, I believe I have this right–when we introduced the second round of LSAPs, properly known as QE2 in I think November 2010, there was a lot of increase in commodity prices at that time, and there was a lot of complaining that the Fed is pumping up commodity prices, and that’s a negative for people around the world. And we argued at the time that the effects of the Federal Reserve’s policy on global commodity prices was probably pretty small and that it operated–to the extent it did have an effect–that it operated through growth, mostly through growth expectations. That is, a stronger global economy tends to drive up commodity prices.
This time around, we’ve purchased and are in the process of purchasing a lot more than we did in so-called QE2. We haven’t really seen much increase in commodity prices. Commodity prices are way off their peaks of early last year. Oil is a little bit different from others and that it’s kind of hung up. But many other commodity prices have fallen further, and the reason I would give for that is that the emerging markets, China, the rest of Asia and some other parts of the world plus Europe, of course, are softer, and so global commodity demand is weaker. And that explains I think the bulk of why commodity prices have not risen so much. So I think that’s all consistent with our story that the effect of asset purchases and commodity prices–I’m not saying at zero–but I don’t think that it’s nearly as big as some folks have suggested.
In terms of wages, I think that’s mostly consistent with our view that unemployment at 7.6 percent is still pretty far from where we should be satisfied. Maximum employment, we think, is again between 5 and 6 percent, although these are very difficult numbers to estimate. So, very weak wage growth except in a few places and a few narrow occupations is indicative to me of the labor market that remains quite slack, and where, you know, that justifies I think–together with low inflation–justifies why we were maintaining a highly combinative policy.
AKIO FUJII. I’m Akio Fujii, Nikkei Newspaper. Thank you, Chairman. Recently, we have seen great volatility in Japanese market–equity, JGB, and foreign exchange. Some say these volatility is due to uncertainty to the Federal Reserve’s policy direction, but others say this is due to lack of confidence to the Bank of Japan’s monetary policy. So how do you view the Bank of Japan’s efforts? Do you still support Bank of Japan policy? And the other question is: How much do you pay attention to the spillover effect to the international market when you consider exit strategy?
CHAIRMAN BERNANKE. Well, I think the volatility is mostly linked to the Bank of Japan’s efforts, and that would seem logical, since in earlier episodes when the Fed was doing asset purchases and the BOJ was not doing anything, there was no volatility. So it sort of, it seems logical that the change here is the change in BOJ policy.
The BOJ is fighting against the very difficult entrenched deflation. Of course, deflation has been a problem in Japan for many, many years, which means that expectations are very much–the public’s expectations are for continuing deflation, and therefore it takes very aggressive policies to break those expectations, since they get inflation up to the two percent target that the Bank of Japan has set.
So that’s why it’s difficult, they’ve had to be very aggressive. That aggressiveness in the early stages of this process, where investors are still learning about the BOJ’s reaction function, it’s not all that surprising that there’s volatility. Also, the JGB markets are less liquid than say, the treasury market for example. So I, you know, I think that’s something they need to pay close attention to, but on the whole, I think that it is important for Japan to attack deflation. And I also agree with the three arrows, the idea that besides breaking deflation, it’s important to address physical and structural issues as well. So, I’m supportive of my colleague, Mr. Kuroda, and I’m supportive of what Japan is doing, even though it does have some effects on our economy as well.
The–there are a lot of reasons why emerging markets and other countries experience capital inflows and volatility. Some of them have to do with changes in growth expectations. For example, we’ve seen a lot of changes in growth patterns in the emerging markets recently. Some of it has to do with risk-on, risk-off behavior, and some of it probably does have to do with monetary policy in advanced economies, which includes of course the United States. We do take it–pay attention to that. I frequently meet with colleagues from emerging markets at the G20 for example, and we discuss these issues. I think the right way to think about it is that, as the G7 and the G20 both have noted, that what U.S. monetary policy, like that of Japan, is trying to do is trying to help this economy grow. And a global recovery, a global–strong global growth depends very much on the U.S. growing at reasonable rate. And so, while there is some effect, I think the net effect, including a stronger U.S. economy, is on the whole positive, and I think most of my colleagues in emerging markets recognize that. That being said, anything we can do through communication or other means to try to minimize any overflow effects or side effects, we will certainly do.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1588.19 as this post is written