On Wednesday, December 12, 2012 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 December 12, 2012, with accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2012” (pdf).
From Ben Bernanke’s opening comments:
Against a macroeconomic backdrop that includes both high unemployment and subdued inflation, the FOMC will maintain its highly accommodative policy. Today the Committee took several steps. First, it decided to continue its purchases of agency mortgage-backed securities(MBS), initiated at the September meeting, at a pace of $40 billion per month. Second, the Committee decided to purchase longer-term Treasury securities, initially at a pace of $45 billion per month, after its current program to extend the average maturity of its holdings is completed at the end of the year. In continuing its asset purchases, the Committee seeks to maintain downward pressure on longer-term interest rates and to keep financial conditions accommodative, thereby promoting hiring and economic growth while ensuring that inflation over time is close to our 2 percent objective. Finally, the Committee today also modified its guidance about future rate policy to provide more information to the public about how it anticipates it will react to evolving economic conditions. I will return to this change in our communication after discussing our decision to continue asset purchases.
Bernanke’s responses as indicated to the various questions:
STEVE LIESMAN. But then you have another paragraph after that that says it’s not just target it’s something else. So, it’s unclear to me what good these targets are if you have to reference to calendar date, and then you kind of say in the next paragraph it’s not really targets.
CHAIRMAN BERNANKE. Well, so first, the–as I said–the asset purchases and the rate increases have different objectives. The asset purchases are about creating some near-term momentum in the economy trying to strengthen growth and job creation in the near term, and the increases in the federal funds rate target when they ultimately occur are about reducing accommodations. Two very different objectives. Secondly, the asset purchases are a less well understood tool. We have–we’ll be learning over time about how efficacious they are, about what costs they may carry with them in terms of unintended consequences that they might create,and we’ll be seeing how–what else happens in the economy that can affect, you know, the level of unemployment, for example, that we hope to achieve. And so, for that reason, as I discussed in my opening remarks, we decided to make the criteria for asset purchases qualitative at this time because we have a number of different things that we need to look at as we go forward. Rate increases by contrast are well understood, and we understand the relationship between those rate increases and the state of the economy. And so we’ve been able to give somewhat more quantitative, more specific guidance in that respect. With respect to the date, in the transition today, we wanted to make clear that the change in guidance did not–it happens to be the case that it doesn’t change our mid-2015 expectation. Going forward, we’ll drop the date and rely on the conditionality, and that has, I think, a very important advantage which is that if news comes in that the economy is stronger or weaker, then financial markets and the public will be able to adjust their expectations when policy tightening will occur without the Committee having to go through a process of changing its date in a nontransparent way, so I think that’s beneficial. Does that cover your–okay.
BINYAMIN APPLEBAUM. Sir, you’ve articulated more clearly than ever your commitment to reduce unemployment, but you’ve also said that you’re not actually doing anything more to achieve that goal; that you still expect it to be three years away; that you’re disappointed with the pace of progress; and that inflation is not the limiting factor. What is the limiting factor? Why is the Fed not announcing today additional measures to reduce unemployment? What would it take for you to get that?
CHAIRMAN BERNANKE. Well, we took–the question was whether this was something new relative to September, I think September was the date where we did do a substantial increase in accommodation. At that point, we announced our dissatisfaction with the state of labor market and the outlook for jobs and said we would take further action if the outlook didn’t improve. And what we’ve done today is really just following through what we said. So, I would say that, you know, looking at it from the perspective of September, that we have, in fact, taken significant additional action to provide support for the recovery and for job creation. The reason–one of the considerations though as I’ve talked about is that, you know, given that we are now in the world of unconventional policy that has both uncertain cost and uncertain efficacy or uncertain benefits, you know, that creates a more–somewhat more complicated policy decision than the old style of just changing the federal funds rate. You know, there are concerns that I’ve talked about in these briefings before that if the balance sheet gets indefinitely large that there would be potential risks in terms of financial stability, in terms of market functioning. And the committee takes these risks very seriously. And they impose a certain cost on policy that doesn’t exist when you’re dealing only with the federal funds rate. And so what we’re trying to do here is balance the potential benefits in terms of lower unemployment and inflation at target against the reality that as the balance sheet gets bigger that there’s greater cost that might be associated with that, and those have to be taken to account.
KRISTINA PETERSON. I’m Kristina Peterson of Dow Jones. Looking over the past year or several years, how would you evaluate the Fed’s accuracy making economic forecasts, and how does that affect the ability to make monetary policy decisions especially if it’s connected to the thresholds?
CHAIRMAN BERNANKE. Well, I think it’s fair to say that we have overestimated the pace of growth, the total output growth, GDP growth from the beginning of the recovery and we have–had therefore had to continue to scale down our estimates of output growth. But interestingly, at the same time, we have been–well, more accurate, not perfectly accurate by any means, but we’ve been somewhat more accurate in forecasting unemployment. And how do you reconcile those two things? I talked about this in remarks I gave at the New York Economic Club recently, right before Thanksgiving. And I think the reconciliation is that what we’re learning is that at least temporarily, the financial crisis may have reduced somewhat the underlying potential growth rate of US economy. It has interfered with business creation, with investment, with technological advances and so on. And that can account for at least part of the somewhat slower growth. At the same time though, what–of course, what monetary policy influences is not potential growth, not the underlying structural growth. That’s for–many other different kinds of policies affect that. What monetary policy affects primarily is the state of the business cycle, the amount of excess unemployment or the extent of recession in the economy. And there, I think we’ve also perhaps underestimated a bit the recession, but we’ve been much closer there. And I think therefore that that we’ve been able to address that somewhat more effectively with quite accommodative policies. That being said of course, we have over time as we have seen disappointment in growth and job creation, we have obviously as we did in September have added accommodation and we’ve continued–we continue to reassess the outlook. I think it’s only fair to say that economic forecasting beyond a few quarters is very, very difficult. And what we basically are trying to do is create a plausible scenario which we think is recently likely based policy on that, but we prepared to adjust as new information comes in and as the outlook changes, and inevitably it will.
GREG IP. Thank you, Mr. Chairman. Greg Ip of The Economist. Economists have long believed that central banks cannot affect unemployment rate in the long run. That’s one reason you’ve seen a move towards central banks being given mandates for low inflation only. Can you explain if the Fed by tying its monetary policy so explicitly to a non-employment threshold where that is consistent or inconsistent with that longstanding view? And if it’s consistent, how is this superior to simply having a threshold for inflation only. And would the approach that you’re now taking be possible if the Fed had only a mandate for low inflation?
CHAIRMAN BERNANKE. Well, it’s entirely consistent with your view with the point that you made. So let–so let me just reiterate it. As we stated in fact in our January set of principles, the Central Bank cannot control unemployment in the long run. I’d add a caveat to this. There’s a little bit of a caveat here which is that very extended periods of unemployment can interfere with the workings of the labor market. And so, if the Fed were not to address a large unemployment problem for a long time, it might in fact have some influence in the long term unemployment rate. But as a general rule, as a general rule, I think this is the right baseline. The long-term unemployment rate is determined by a range of structural features of the economy and a range of economic policies and not by monetary policy. So that being said, what our six and a half percent threshold is is as I said in my opening remarks, it is not a target. What it is is a guide post in terms of when the beginning of the reduction of accommodation could begin. It could be later than that, but at least by that time, no earlier than that time. So it’s really more like a reaction function or a Taylor rule if you will. I don’t want–I’m–I’ll get it–I’m ready to get the phone call from John Taylor. It is not a Taylor rule but it has the same feature that it relates policy to observables in the economy such as unemployment and inflation. So, what it’s basically doing is saying how our policy will evolve over time as the economy evolves. It has no implication that we can affect the long run unemployment rate which we believe is lower than six and a half percent. We think it’s somewhere between five and six according to our SEP projections. We are a dual mandate central bank and I think that providing information on both sides is more helpful. So, I understand your point but I think that it’s–that providing information on unemployment and inflation gives more information to the markets to the public that allows them to infer how our policy is likely to evolve.
JOSH ZUMBRUN. Mr. Chairman, Josh Zumbrun, Bloomberg News. By the mid-2015, their cover is going to be nearly six years old. The average post-war recovery has been a little less than five. We’re already banking on a very long expansion. You expect by mid-2015 the fund rate is going to be at zero percent, your balance sheet is potentially at 4 trillion dollars. If the business cycle runs out of steam and you’re still at zero percent interest rates, does the Fed no longer have a forceful response in that situation?
CHAIRMAN BERNANKE. Well, the Fed will always, you know, keep–we’ve innovated quite a bit in the last few years and it’s always possible we could find new ways to provide support for the economy. But it’s certainly true. I’m–you know, there’s no doubt that with interest rates near zero and with the balance sheet already large that the ability to provide additional accommodation is not unlimited and that that’s just a reality and that actually is an argument, I think, for being a little bit more aggressive now. I mean, it’s it’s a really good objective to get the economy moving, to get some momentum that protects the economy against unanticipated shocks that might occur and gets us off to zero bound earlier. So, exactly for those reasons, the kind of risks that arise when the, when policy interest rates are close to zero and to greater difficulty in providing additional policy support, I think that’s an argument for for being somewhat more proactive now when we still have the ability to do that and to try to get the economy, you know, back to a healthy condition.
KEVIN HALL. The debate over the extent to which unemployment rate is falling. New jobs versus people leaving.
CHAIRMAN BERNANKE. Yes. Well, you know, you can see the comparison by looking, for example, at the household survey, which gives estimates of how many people are added to the labor force, how many are added to the employed, how many people are leaving labor force, and it’s true that part of the decline in unemployment–and indeed all of it in the last reading, but over the recovery, part of the decline in unemployment has come from declines in participation rates;that is, people leaving the labor force. Some of that decline in participation appears to be due to longer-run factors, aging and changing patterns of work among women. So those things were probably not directly related to the recession, for example. But beyond that downward trend, there’s been some additional decline in labor force participation and in the ratio of employment to population, which presumably is linked to discouragement about the state of the labor force. So that certainly is part of the issue. That being said, obviously there has been a good bit of job creation. You can see that either in the household survey or in the payroll establishment survey. So I think there’s no doubt that the labor market is considerably better today than it was two years ago. There’s not any question about that, but it’s also the case that many indicators of the labor market remain quite weak, ranging from the number of long-term unemployed, number of people who have part-time work who would like full-time work. Wage growth obviously is very weak, and that could go on. So it may be that the labor market is even a bit weaker than the current unemployment rate suggests, but I think that it is nevertheless the case that there has been improvement since the trough a couple of years ago.
STEVE BECKNER. Mr. Chairman, Steve Beckner of Market News International. With the federal government borrowing roughly one trillion dollars a year and now with the Fed on pace to buy roughly a trillion dollars a year in bonds, are you concerned about a public and possibly global perception that the Fed is accommodating not just growth but accommodating federal borrowing needs, and are you concerned about what this might do to the Fed’s credibility and the credibility of U.S. finances in general and the credibility of the dollar as the world’s leading currency?
CHAIRMAN BERNANKE. Well first of all, just a couple of facts. The–we’re buying Treasuries and mortgage-backed securities, about half and half roughly. So we’re buying considerably less than the Treasury is issuing, and moreover, the share of outstanding Treasuries that the Federal Reserve owns is not all that different from what it was before the crisis, because while our holdings have increased, so has the–obviously the stock of Treasuries in public hands. So it’s not quite evident that there has been such a radical shift there. You know, we’ve been increasing our balance sheet now for some time, and we’ve been very clear that this is a temporary measure. It’s a way to provide additional accommodation to an economy which needs support. We’ve been equally clear that we will normalize the balance sheet that will reduce the size of our holdings and whether by letting them run off or by selling assets in the future. So this is, again, only a temporary step. It would be quite a different matter if we were buying these assets and holding them indefinitely. That would be a modernization. We’re not doing that. We are very clear about our intentions. And I think up till now, it seems our credibility has been quite good. There is not any sign either of current inflation or of any–there’s no strong evidence that there are any increase in inflation expectations for that matter, looking at financial markets, looking at surveys, looking at economic forecasts and so on. So, this is one of the things that we have to look at. Remember, I talked earlier about the potential costs of a large balance sheet. We want to be sure that there’s no misunderstanding, that there’s no effect on inflation expectations from the size of our balance sheet. That’s one of the things we have to look at, but as to this point, that there really is no evidence that the people are taking it that way. And I guess it’s worth pointing out–of course we’ve been very focused on the United States here, but we’re not the only central bank that has increased the size of its balance sheet. The Japanese, the Europeans, the British have all done the same and very much more or less the same extent in terms of the fraction of GDP, and I think the sophisticated market players and the public understand that this is part of a collective need, a need to provide additional accommodation to weak economies and not an accommodation of fiscal policy.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1413.58 as this post is written