Category Archives: Ben Bernanke

The Federal Reserve’s “Dual Mandate”

Recently, there has been increasing mention of the Federal Reserve’s “Dual Mandate.”

While my thoughts on the topic are complex, and I am not necessarily in agreement with it, I think highlighting some reference material on the the “Dual Mandate” is apropos as I expect there to be much more mention of this in the future.

One of the most thorough discussions of the “Dual Mandate” – especially in the context of our current economic situation – can be found in a February 13, 2012 speech by FRBSF President and CEO John C. Williams titled “The Federal Reserve’s Mandate and Best Practice Monetary Policy.”

An excerpt from the speech:

Let me start with the Fed’s mission. It’s often said that Congress assigned the Federal Reserve a dual mandate: maximum employment and stable prices. But, that’s not quite accurate. In fact, the Fed has a triple mandate. Section 2A of the Federal Reserve Act calls on the Fed to maintain growth of money and credit consistent—and I quote—“with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The above paragraph contains a footnote referencing the following, as seen in the Federal Reserve Act, Section 2A (Monetary Policy Objectives):

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]

The speech also contains a variety of other notable material, including some long-term charts illustrating various pertinent metrics concerning the “Dual Mandate,” as well as the first endnote, an excerpt of which is seen below:

It is interesting to note that the Federal Reserve’s legal mandate has evolved over time in response to economic events and advances in understanding of how monetary policy and the economy function. For example, in the original Federal Reserve Act of 1913, the Fed had no mandate for macroeconomic stabilization and was only charged with providing an “elastic currency” and to act as a lender of last resort for banks. The quote here originates in the Federal Reserve Reform Act of 1977 and remains in place today. See Judd and Rudebusch (1999) for some discussion and more details.

The Federal Reserve Bank of Chicago also maintains a page on the “Dual Mandate” with charts updated as of May 9, 2012.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1320.06 as this post is written

Ben Bernanke’s April 25, 2012 Press Conference – Notable Aspects

On Wednesday, April 25, Ben Bernanke gave his scheduled press conference.

Here are Ben Bernanke’s comments I found most notable, in the order they appear in the transcript, although I don’t necessarily agree with them.  These comments are excerpted from the “Transcript of Chairman Bernanke’s Press Conference“(preliminary)(pdf) of April 25, 2012, with accompanying economic projections (pdf).

Bernanke’s responses as indicated to the various questions:

Thank you Mr. Chairman, Darren Gersh, Nightly Business Report: Some of your critics, I’m sure you’re not going to be surprised think that you’re still being too cautious that unemployment is still high, the economy may be slowing, inflation is subdued, but I know you just talked about the balance sheet. But given that, is the Committee now any closer to QE3 than it was at its last meeting?

Chairman Bernanke: Well first, the Committee has certainly been bold and aggressive in terms of easing monetary policy. We’ve maintained the Federal Funds Rate close to zero since late 2008. We’ve had two rounds of so-called quantitative easing. We’ve had a Maturity Extension Program which is ongoing. We have offered a guidance about the Federal Funds Rate that goes into at least late 2014. So we had been very accommodative and we remained prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target. So in particular, we will continue to assess, you
know, looking at the economic outlook, looking at the risk, whether or not unemployment is making sufficient progress towards this longer run, normal level, and whether inflation is remaining close to target.  And if appropriate and depending also on assessment of the costs and risks of additional policy actions, we are–remained entirely prepared to take additional balance sheet actions if necessary to achieve our objectives. So those tools remain very much on the table and we will not hesitate to use them should the economy require that additional support.

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Dynamics And Risks Of The Federal Reserve’s Portfolio

In previous posts I have written extensively of the intervention measures taken by the Federal Reserve, including the many risks involved with Quantitative Easing measures.   One of the risks is the resulting size of the Federal Reserve’s portfolio and its inherent susceptibility to large (on a mark-to-market basis, as opposed to accounting basis) losses.

This risk greatly lacks recognition.  It appears that many people discount the risk of losses, as well as the potential for the Federal Reserve to exhaust its capital base, as they figure that the Treasury can always replenish the capital.  However, I believe that this reasoning is  shortsighted on many fronts.  Compounding the complexity of the potential for large losses in the Federal Reserve’s portfolio is the fact that any action it may take with regard to acquiring or disposing of these assets has to be weighed against the risks or damage that such acquisition or disposition incurs in the economy and/or financial markets.  Given the complexity of the situation, the exceedingly large asset base and its leverage, and the uncertainties inherent in the markets – especially during times of financial stress or crises – asset acquisition, disposition, and willingness to take losses on the portfolio becomes a (very) complex matter.  While I am not aware of any recent Federal Reserve statements on this matter,  a FRBSF Paper of April 11, 2011 titled “The Fed’s Interest Rate Risk” (pdf) contains the following excerpts:

The Fed, of course, strives to be a cost-efficient steward of the public purse. But its statutory mandate for conducting monetary policy is to promote maximum employment and price stability. These macroeconomic goals are the key metrics for judging monetary policy. Financial considerations—even potentially large capital losses—are secondary.

also (under “Conclusion”) :

In its policy actions, the Fed’s primary focus has been on restoring the economy to health and maintaining low inflation. The Fed’s recent securities purchases appear likely to register financial gains, though these are at risk if interest rates rise. However, as then-professor Ben Bernanke (2000) wrote: For a central bank “to allow consideration of possible capital losses to block needed policy actions is misguided.” That is, interest rate risk should be a secondary consideration, subordinate to the macroeconomic goals of monetary policy.

There is also the possibility of exit from QE under exigent circumstances, which represents an adverse scenario fraught with peril.

Accentuating the dangers of the situation are the fact that interest rates are (depending upon the specific instrument) very near – or at – very-long term lows and my assessment (also held by many) that the bond market is an asset bubble.

Cumberland Advisors has published a notable document explaining its CUMB-E Index (pdf) that illustrates some of the main dynamics of the Federal Reserve’s portfolio and their trends, including its capital base / leverage and its sensitivity to increases in interest rates.  As of February 29, the CUMB-E Index is at .438.

One interpretation that could be made is that if this were the portfolio of a commercial bank or hedge fund, with leverage of 50+:1  and with the aforementioned sensitivities and market dynamics – it would represent an exceedingly high risk situation.

As well, there are a variety of other notable risk aspects and dangers inherent in the situation that lack recognition, which I may discuss in future writings.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1343.36 as this post is written

Federal Reserve Philosophies – Then And Now

On Monday, February 13, John C. Williams, President and CEO, Federal Reserve Bank of San Francisco, gave a speech titled “The Federal Reserve’s Mandate and Best Practice Monetary Policy.”

Although I don’t agree with many aspects of the speech, I found various aspects to be notable.  I would like to highlight one excerpt in particular, as I find it highly memorable and an iconic quote of the period:

With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open.

I think it is interesting to compare this excerpt to a famous quote by William McChesney Martin, who was Chairman of The Federal Reserve from 1951-1970; Martin declared that the Federal Reserve’s role was “to take away the punch bowl just as the party gets going.”

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Another notable excerpt from Williams’ speech of Monday I would like to highlight as highly significant, especially the second paragraph, which concludes the speech :

We have pushed the federal funds rate close to zero because of the severe recession of 2007 through 2009, and the weak recovery since. We’ve said we expect to keep the federal funds rate extremely low at least through late 2014. Meanwhile, with the fed funds rate near zero, we’ve used some unconventional monetary policy tools to try to push down longer-term interest rates further. Our policy initiatives are a major reason why interest rates across the entire yield curve are at or near record low levels for the post-World War II period.

This is truly an extraordinary time for monetary policy. I’ve talked about some of the tradeoffs central bankers face. But I don’t see such tradeoffs today. Now is one of those moments when everything points in the same direction. The Fed is committed to achieving maximum employment and price stability. And we’re doing everything in our power to move towards those goals. Thank you very much.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1358.04 as this post is written

Ben Bernanke’s January 25, 2012 Press Conference – Notable Aspects

On Wednesday, January 25, Ben Bernanke gave his scheduled press conference.

Here are Ben Bernanke’s comments I found most notable, although I don’t necessarily agree with them.  These comments are excerpted from the “Transcript of Chairman Bernanke’s Press Conference“(preliminary)(pdf) of January 25, 2012, with accompanying economic projections (pdf).

Bernanke’s responses as indicated to the various questions:

Opening Remarks:

from page 5 :

The longer-run projections shown…represent participants’ assessments of the rate to which each variable converge over time under appropriate monetary policy, and in the absence of further shocks to the economy.

from page 7 (with regard to the initial increase in Fed Funds target rate) : 

Six participants anticipate that policy firming is likely to commence in 2015 or 2016 while five others depict policy firming to commence in 2014. The remaining six participants judged that policy lift-off would be
appropriate in 2012 or 2013.

from page 8:

In particular, the Committee recognizes that hardships imposed by high and persistent unemployment in an underperforming economy and it is prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level or if inflation show signs and moving further below its mandate consistent rate.

Q&A:

from page 8:

Steve Liesman: Thank you. Steve Liesman, CNBC. Mr. Chairman, we’ve had several months of economic data that’s been stronger than most forecasters expected. Employment was over 200,000, unemployment rates come down 8 1/2 percent. But there seems to be very little mention of this recent strength in the statement. Do you and the Committee, Mr. Chairman, harbored doubts about the recent strength in the economy? And are you and the Committee baking in additional quantitative easing in order to achieve the growth rates that you’ve even forecast here? Thank you.

Chairman Bernanke: Steve, there have certainly been some encouraging news recently. We’ve seen slightly better performance in the labor market. Consumer sentiment has improved. Industrial production has been relatively strong. So there are some positive signs, no doubt. At the same time, we’ve had mixed results in some other areas, such as retail sales and we continue to see headwinds emanating from Europe coming from the slowing global economy and some other factors as well.  So, you know, we are obviously hoping that the strength we saw on the fourth quarter and in recent data will continue into 2012 but we’re going to continue to monitor that situation. I don’t think we are ready to declare that we’ve entered a new stronger phase at this point and we’ll continue to look at the data. We will, as I’ve said in my statement, and as we have in fact in the FOMC statement, you know, we continued to review our holdings, our portfolio holdings, securities, and we are prepared to take further steps in that direction if we see that the recovery’s faltering or if inflation is not moving towards target. So, that’s something as an option that’s certainly on the table. I think it would be premature to say definitively one way or the other, but we continue to look at that option and if conditions warrant, we will certainly consider using it.

from page 24:

Darren Gersh: Darren Gersh, Nightly Business Report. Let me kind of follow up on Peter’s question, why shouldn’t somebody looking at these numbers from the outside say, “look, as aggressive as you say you’ve been, as aggressive as you have been, it doesn’t look like you’re meeting any of your goals the next three years on the economy, so, why isn’t the Fed doing more now?”

Chairman Bernanke: Well, again, as I said earlier, the Fed has been doing a great deal. Just since August we have put a date on our expected period of low interest rates. We undertook the maturity extension program which is still continuing. Today, we announced a further extension of the expected period of low rates by issuing these expected policy rate information, we hope to convey to the market the extent to which there is support on the Committee for maintaining rates at a low level for a significant time. So, you know, I don’t accept the premise that we’ve been passive, we’ve been actually quite active in our policy and in one respect, the low level inflation is a validation in the following sense that there were some who are very concerned that our balance sheet policies and the like would lead to high inflation. There is certainly no sign of that yet and it hasn’t shown up either in financial markets or in outside forecasters’expectations. Now that being said, as I mentioned earlier, if the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then more, our framework, the logic of our framework says we should be looking for ways to do more, it’s not completely straightforward because, of course, we’re now dealing with a variety of nonstandard policy tools, we can’t just lower the federal funds rate 25 basis points like in the good old days but your basic point is right that, you know, we need to adopt policies that will both achieve our inflation objectives and help the economy recover as quickly as is feasible and I would say that your question, actually and earlier question, shows a benefit of explaining this framework because the framework makes very clear that we need to be thinking about ways in which we can provide further stimulus if we don’t get some improvement in the pace of recovery and normalization of inflation.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1316.33 as this post is written

Ben Bernanke’s November 2 Press Conference – Notable Aspects

On Wednesday November 2 Ben Bernanke gave his scheduled Press Conference.

Here are Ben Bernanke’s comments I found most notable, although I don’t necessarily agree with them.  These comments are excerpted from the “Transcript of Chairman Bernanke’s Press Conference” of November 2 2011 (preliminary) (pdf), with Bernanke’s responses as indicated to the various questions:

from page 4 (Opening Remarks):

In short, while we still expect that economic activity and labor market conditions, will improve gradually over time, the pace of the progress is likely to be frustratingly slow. Moreover, there are significant downside risks to the economic outlook. Most notably, concerns about
European fiscal and banking issues have contributed to strains in global financial markets which have likely had adverse effects on confidence and growth.

from page 7:

Binyamin Appelbaum: Has the Fed discussed the idea of nominal GDP targeting and what are your views on the advantages and disadvantages of that approach?

Chairman Bernanke: So the Fed’s mandate is of course a dual mandate.  We have a mandate for both employment and for price stability and we have a framework in place that allows us to communicate and to think about that, the two sides of that mandate. We talked today–or
yesterday actually–about nominal GDP as indicators and information variable as something to add to the list of variables that we think about and it was a very interesting discussion. However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy. So we are not contemplating at this at this time any radical change in framework. We’re going to stay within the dual mandate approach that we’ve been using until this point.

from page 14:

Neil Irwin: Neil Irwin with the Washington Post. Mr. Chairman this is the third straight set of economic projections released that have downgraded forecasts for growth and for employment. I wonder, is there some systematic error, some blind spot that’s behind these kind of overly optimistic forecasts? What are you doing internally to understand what you got wrong the last two projections?

Chairman Bernanke: Well, it’s a perfectly fair question. And, you know, we spend a lot of time reviewing those errors, the staff in particular presents us with information on –on forecast errors and on revisions, et cetera. And so we look at that very carefully. I think it’s clear that in retrospect that the severity of the financial crisis and a number of other problems including the dysfunction of the
housing market have been more severe and more persistent than we initially believed and that together with a number of other phenomena like deleveraging by the household sector and so on has slowed the pace of recovery. So, yes, we have again downgraded the medium-term forecast, evidently the forces–you know, the drags on the recovery were stronger than we thought. I would add, however, though that although I think it’s very important to look at the fundamental factors affecting the recovery, there’s been some elements of bad luck. For example this year, the combination of the natural disaster in Japan, which had global impacts in terms of growth; oil price
increases; the European debt crisis, which was not anticipated to be as severe and has created as much volatilities as it has in financial markets, all those things had been negatives for growth and they doexplain at least part of the–of the downward revision.

from page 15:

Michael McKee: Michael McKee with Bloomberg Television. Many Americans wonder what the Fed has actually accomplished with its monetary policy actions since about QE2. Fed officials like to talk about the effect they’ve had on interest rates but the economy seems insensitive to interest rates these days. Can you explain what you have managed to accomplish? Can you tell us whether you feel your mandate requires you to do anything you can think of on an ongoing basis until some targets are met? And can you explain to the average American why you’re doing what you’re doing? And do you think that you risk credibility if the average American doesn’t see some sort of improvement in the economy?

Chairman Bernanke: No, it’s a fair question. I would first say that our monetary policy is having effects on the economy and we’ve talked about the effects on asset prices but we have continued to analyze the effects of changes in interest rates for example on decisions like investment or car purchases. One area where monetary policy has been blunted, the effects have been blunted, has been the mortgage market where very tight credit standards have prevented many people from purchasing or refinancing their homes and therefore the low mortgage rates that we’ve achieved have not been as effective as we had hoped.  So, monetary policy maybe is somewhat less powerful in the current  context than it has been in the past but nevertheless it is affecting  economic growth and job creation. If you ask about the accomplishments, I would first of all mention a very important one which is that we have kept inflation close to 2 percent on average, which both has avoided the problems of high inflation but also very importantly has avoided the risk of deflation. And we have seen in other countries, in other contexts that deflation can be a very pernicious problem and very difficult to get out of once you are there. So, we have been able to achieve on average stable prices. With respect to growth, I think that our policies including the cutting rates to zero in December 2008 and the, the first round of–of asset purchases in the fall of ’08 and in the spring of ’09 were very important for helping to explain why the economy stopped contracting and began to grow again in the middle of 2009. I think there’s a lot of evidence that that did promote growth and job creation. I would
argue that we’ve also been successful with some of the later actions that we’ve taken, although it’s early to say for things like the maturity extension program. But we always face the problem of asking the question of: Where we would be without these policies? And our best estimates are that absent the support of monetary policy that the economy would be in a much deeper ditch and that unemployment would be much higher than it is. That being said, you know, again people rightly recognize that we have not yet gotten the economy back to where we want it to be and their dissatisfaction is perfectly understandable. Yes, I do think that with, you know, that we do need to do whatever we can to move the economy towards price stability and maximum employment. We’ll continue to do that so long as the tools that we have are efficacious and that they don’t have costs or risks or negative side effects that are worse than the benefits, we’ll always be making that evaluation.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1253.23 as this post is written

Ben Bernanke’s Jackson Hole Speech – Notable Excerpts

On Friday August 26 Ben Bernanke gave a speech at Jackson Hole titled “The Near- and Longer-Term  Prospects for the U.S. Economy.”

I do not agree with various comments in the speech.  However, here are a few excerpts that I found most noteworthy:

As I will discuss, although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.

also:

In the United States, a cyclical recovery, though a modest one by historical standards, is in its ninth quarter. In the financial sphere, the U.S. banking system is generally much healthier now, with banks holding substantially more capital.

also:

Notwithstanding these more positive developments, however, it is clear that the recovery from the crisis has been much less robust than we had hoped. From the latest comprehensive revisions to the national accounts as well as the most recent estimates of growth in the first half of this year, we have learned that the recession was even deeper and the recovery even weaker than we had thought; indeed, aggregate output in the United States still has not returned to the level that it attained before the crisis. Importantly, economic growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment, which has recently been fluctuating a bit above 9 percent. Temporary factors, including the effects of the run-up in commodity prices on consumer and business budgets and the effect of the Japanese disaster on global supply chains and production, were part of the reason for the weak performance of the economy in the first half of 2011; accordingly, growth in the second half looks likely to improve as their influence recedes. However, the incoming data suggest that other, more persistent factors also have been at work.

also:

Nevertheless, financial stress has been and continues to be a significant drag on the recovery, both here and abroad. Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation, including the recent downgrade of the U.S. long-term credit rating by one of the major rating agencies and the controversy concerning the raising of the U.S. federal debt ceiling.

also:

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

also:

Notwithstanding the trauma of the crisis and the recession, the U.S. economy remains the largest in the world, with a highly diverse mix of industries and a degree of international competitiveness that, if anything, has improved in recent years. Our economy retains its traditional advantages of a strong market orientation, a robust entrepreneurial culture, and flexible capital and labor markets. And our country remains a technological leader, with many of the world’s leading research universities and the highest spending on research and development of any nation.

Of course, the United States faces many growth challenges. Our population is aging, like those of many other advanced economies, and our society will have to adapt over time to an older workforce. Our K-12 educational system, despite considerable strengths, poorly serves a substantial portion of our population. The costs of health care in the United States are the highest in the world, without fully commensurate results in terms of health outcomes. But all of these long-term issues were well known before the crisis; efforts to address these problems have been ongoing, and these efforts will continue and, I hope, intensify.

also:

Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.

also:

To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.1

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1197.48 as this post is written

Ben Bernanke’s Prepared Testimony July 13 – Notable Excerpts

Yesterday Ben Bernanke gave his testimony before the Committee on Financial Services as part of the Semiannual Monetary Policy Report to the Congress.

His prepared testimony didn’t seem to contain content significantly different from that he has previously stated.

However, in my opinion, his prepared testimony does serve as a convenient collection of various of his current thoughts and analyses.

While I don’t agree with various of the following excerpts, I do find them notable:

(note – these excerpts are in the order they appear in the prepared testimony)

In part, the recent weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary.

In light of these developments, the most recent projections by members of the Federal Reserve Board and presidents of the Federal Reserve Banks, prepared in conjunction with the Federal Open Market Committee (FOMC) meeting in late June, reflected their assessment that the pace of the economic recovery will pick up in coming quarters. Specifically, participants’ projections for the increase in real GDP have a central tendency of 2.7 to 2.9 percent for 2011, inclusive of the weak first half, and 3.3 to 3.7 percent in 2012–projections that, if realized, would constitute a notably better performance than we have seen so far this year.1

 Long-term unemployment imposes severe economic hardships on the unemployed and their families, and, by leading to an erosion of skills of those without work, it both impairs their lifetime employment prospects and reduces the productive potential of our economy as a whole.

… many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes, the substantial backlog of vacant properties for sale, and the high proportion of distressed sales are keeping downward pressure on house prices.

The Federal Reserve’s acquisition of longer-term Treasury securities boosted the prices of such securities and caused longer-term Treasury yields to be lower than they would have been otherwise. In addition, by removing substantial quantities of longer-term Treasury securities from the market, the Fed’s purchases induced private investors to acquire other assets that serve as substitutes for Treasury securities in the financial marketplace, such as corporate bonds and mortgage-backed securities. By this means, the Fed’s asset purchase program–like more conventional monetary policy–has served to reduce the yields and increase the prices of those other assets as well. The net result of these actions is lower borrowing costs and easier financial conditions throughout the economy.2 We know from many decades of experience with monetary policy that, when the economy is operating below its potential, easier financial conditions tend to promote more rapid economic growth. Estimates based on a number of recent studies as well as Federal Reserve analyses suggest that, all else being equal, the second round of asset purchases probably lowered longer-term interest rates approximately 10 to 30 basis points.3 Our analysis further indicates that a reduction in longer-term interest rates of this magnitude would be roughly equivalent in terms of its effect on the economy to a 40 to 120 basis point reduction in the federal funds rate.

When we began this program, we certainly did not expect it to be a panacea for the country’s economic problems. However, as the expansion weakened last summer, developments with respect to both components of our dual mandate implied that additional monetary accommodation was needed. In that context, we believed that the program would both help reduce the risk of deflation that had emerged and provide a needed boost to faltering economic activity and job creation. The experience to date with the round of securities purchases that just ended suggests that the program had the intended effects of reducing the risk of deflation and shoring up economic activity. In the months following the August announcement of our policy of reinvesting maturing and redeemed securities and our signal that we were considering more purchases, inflation compensation as measured in the market for inflation-indexed securities rose from low to more normal levels, suggesting that the perceived risks of deflation had receded markedly. This was a significant achievement, as we know from the Japanese experience that protracted deflation can be quite costly in terms of weaker economic growth.

Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation. However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.

On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.

The full Monetary Policy Report to the Congress (pdf) contains a variety of commentary and analyses as well as detailed economic forecasts.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1317.72 as this post is written

Ben Bernanke’s June 22 Press Conference – Notable Aspects

On Wednesday June 22 Ben Bernanke gave his scheduled Press Conference.  Overall, I found his remarks less notable than that of his April 27 Press Conference, which I commented upon in the April 28 post titled “Ben Bernanke’s April 27 Press Conference – My Comments.”

Here are Ben Bernanke’s comments I found most notable, although I don’t necessarily agree with them.  These comments are excerpted from the transcript (preliminary) (pdf), with Bernanke’s responses as indicated to the various questions:

from page 6:

Greg Ip: Mr. Chairman, the Committee lowered not just this year’s central tendency forecast but also 2012.  And, yet, the statement of the Committee attributes most of the revision forecast to temporary factors.  So I was wondering if you could explain what seems to be persisting in terms of holding the recovery back.  I did see the statement says in part to factors that are likely to be temporary.  Are there more permanent factors that are producing a worse outlook than three months ago?

Chairman Bernanke: Well, as you — as you point out, what we say is that the temporary factors are in part the reason for the slowdown.  In other words, part of the slowdown is temporary, and part of it may be longer lasting.  We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace from — than we had anticipated in April.  We don’t have a precise read on why this slower pace of growth is persisting.  One way to think about it is that maybe some of the headwinds that have been concerning us like, you know, weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, some of these headwinds may be stronger and more persistent than we thought.  And I think it’s an appropriate balance to attribute the slowdown partly to these identifiable temporary factors but to acknowledge a possibility that some of the slowdown is due to factors which are longer lived and which will be still operative by next year.  You note that, in 2013, we have growth at about the same rate that we anticipated in April.

from page 6:

Bernanke, in response to a question about further easing, from Steve Liesman:

With respect to additional asset purchases, we haven’t taken any action, obviously, today.  We’ll be reviewing the outlook going forward.  It will be a Committee decision.  I think the point I would make, though, in terms of where we are today versus where we were, say, in August of last year when I began to talk about asset purchases is that at that time inflation was very low and falling.  Many objective indicators suggested that deflation was a nontrivial risk.  And I think that the securities purchases have been very successful in eliminating deflation risk.  I don’t think people appreciate necessarily that deflation can be a very pernicious situation where — could have very longlasting effects on economic growth.

In addition, growth in payrolls has actually picked up.  In the four months before the Jackson Hole speech in August, there was about an 80,000 per-month payroll increase.  So far in 2011, including the weak payroll report in May, the average is closer to 180,000.  So there has been improvement in the labor market, albeit not as strong as we would like.  As of last August, we were essentially missing significantly in both — on both sides of our mandate.  Inflation was too low and falling, and unemployment looked like it might be even beginning to rise again.  In that case, the case for monetary action was pretty clear in my mind.  I think we are in a different position today, certainly not where we’d like to be but closer to the dual mandate objectives than we were at that time.  So, again, the situation is different today than last August; but we’ll continue to monitor the economy and act as needed.

from page 20:

Bernanke’s response to a question about the timing of the growth rate of employment:

In terms of the unemployment rate, though, given that growth is not much above the long-run potential rate of growth — and we have in our projections an estimate of 2.5 to 2.8 percent.  We haven’t really done much better than that — it takes growth faster than potential to bring down unemployment.  And since we’re not getting that, we project unemployment to come down very painfully slowly.  At some point, if growth picks up as we anticipate, job numbers will start getting better.  We’re still some years away from full employment in the sense of 5 ½ percent, say; and that’s, of course, very frustrating because it means that many people will be out of work for a very extended time.  And that can have significant long-term consequences that concern me very much.

from page 21:

Akihiro Okada: Mr. Chairman, I am Akihiro Okada with Yomiuri Shimbun, a Japanese newspaper. During the Japanese lost decade in the 1990s, you strongly criticized Japan’s radical policies. Recently Barry Summers suggested in his column that the U.S. is in the middle of its own lost decade.  Based on those points with QE2 ending, what do you think of Japan’s experience and the reality facing the U.S.?  Are there any history lessons that we should be reminded about?  Thank you.

Chairman Bernanke: Well, I’m a little bit more sympathetic to central bankers now than I was ten years ago.  I think it’s very important to understand that in my comments, both in my comment in the published comment a decade ago as well as in my speech in 2002 about deflation, my main point was that a determined  central bank can always do something about deflation.  After all, inflation is a monetary phenomenon, a central bank can always create money, so on.  I also argued — and I think it’s well understood that deflation, persistent deflation can be a very debilitating factor in — in growth and employment in an economy.  So we acted on that advice here in the United States, as I just described, in August, September of last year.  We could infer from, say, TIPS prices and inflation index bond prices, that investors saw something on the order of one-third chance of outright deflation going forward.  So there was a significant risk there.  The securities purchases that we did were intended in part to end that risk of deflation.  And I think it’s widely agreed that we succeeded in ending that deflation risk.  I think also that our policies were constructive on the employment side.  This, I realize, is a bit more controversial.  But we did take actions as needed, even though we were to zero lower bound of interest rates, to address deflation. So that was the thrust of my remarks ten years ago.  And we’ve been consistent with that — with that approach.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1283.50 as this post is written

J. Eftin Frenett Quote On Bernanke

From time to time I post quotes from others regarding Ben Bernanke.

Here is one from this week’s Barron’s (June 4) “Mailbag” section.  It is a quote from J. Eftin Frenett.  While I don’t necessarily agree with (all of) it, I thought it was an interesting perspective and one that deserves contemplation:

 

To the Editor:
The Federal Reserve’s Ben Bernanke is like an engineer who fails to properly define system scope. While the models and simulations appear robust, real-world application leads to seemingly inexplicable failure. What Bernanke has failed to account for are the resources and circumstances out of his control.

The coming crash in U.S. financial markets will be triggered by failures overseas. Investors will suddenly realize that the appropriate risk premium for even top-tier assets is far higher than what they had previously believed.
J. Eftin Frenett
Spencerport, N.Y.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1289 as this post is written