On Wednesday, March 20, 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 March 20, 2013, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, March 2013” (pdf).
From Ben Bernanke’s opening comments:
The data since our January meeting have been generally consistent with our expectation that the fourth-quarter pause in the recovery would prove temporary and that moderate economic growth would resume.
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Overall, still-high unemployment, in combination with relatively low inflation, underscores the need for policies that will support progress toward maximum employment in a context of price stability.
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As you already know from the policy statement, we are continuing the asset purchase program first announced in September. This decision was supported by our review at this meeting of the likely efficacy, costs, and risks of additional purchases. Let me briefly summarize the cost-benefit analysis supporting our decision.
Although estimates of the efficacy of the Federal Reserve’s asset purchases are necessarily uncertain, most participants agreed that these purchases—by putting downward pressure on longer-term interest rates, including mortgage rates—continue to provide meaningful support to economic growth and job creation. However, most also agreed that this monetary tool would likely not be able on its own to fully offset major economic headwinds, such as those that might arise from significant near-term fiscal restraint or from a sharp increase in global financial stresses.
We also had a thorough discussion of possible costs and risks of continued expansion of the Federal Reserve’s balance sheet. The risks include possible adverse implications of additional purchases for the functioning of securities markets, and the potential effects—under various scenarios—of a larger balance sheet on the Federal Reserve’s earnings from its asset holdings and, hence, on its remittances to the Treasury. The Committee also considered possible risks to financial stability, such as might arise if persistently low rates lead some market participants to take on excessive risk in a “reach for yield.” In the Committee’s view, these costs remain manageable, but will continue to be monitored and we will take them into appropriate account as we determine the size, pace, and composition of our asset purchases.
Bernanke’s responses as indicated to the various questions:
YLAN MUI. Hi. Ylan Mui, Washington Post. My question is around QE. Obviously, we’ve seen some of your colleagues giving more specific criteria, give some color around what they’re looking for before they would consider exiting from QE. Can you give us any additional color on what you’re looking for specifically in terms of substantial improvement in labor market? And does the fact that there aren’t thresholds associated with QE say anything about the level of disagreement among the committee members over what that exit should look like?
CHAIRMAN BERNANKE. Well, I’ll take your second question first. The lack of thresholds comes from the complexity of the problem. On the one hand, we have benefits, which are associated with improvements in the economy, but there are also costs associated with unconventional policy, such as potential effects of financial stability, which are hard to quantify and which people have different views about. So to this point, we’ve not been able to give quantitative thresholds for the asset purchases in the same way that we have for the federal funds rate target. We’re going to continue to try to provide the information as we go forward. In particular, as I mentioned today, as we make progress towards our objective, we may adjust the flow rate of purchases month to month to appropriately calibrate the amount of accommodation we’re providing given the outlook for the labor market.
In terms of further color, again given the complexity of the issue, we’ve not given quantitative analysis or quantitative thresholds. I would say that we’ll be looking for sustained improvement in a range of key labor market indicators, including obviously payrolls, unemployment rate, but also others like the hiring rate, the claims for unemployment insurance, quit rates, wage rates, and so on. We’re looking for sustained improvement across a range of indicators and in a way that’s taking place throughout the economy. And since we’re looking at the outlook, we’re looking at the prospects rather than the current state of the labor market, we’ll also be looking at things like growth to try to understand whether there’s sufficient momentum in the economy to provide demand for labor going forward. So that will allow us to look through perhaps some temporary fluctuations associated with short-term shocks or problems.
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PETER BARNES. Peter Barnes of Fox Business, sir. The stock market has been hitting all-time highs. It’s recovered all of its losses from the financial crisis. I just want to know if I-from you if I still have time to get in.
[Laughter.]
PETER BARNES. But seriously, how do you feel about that? Is it good? Is it bad? Mission accomplished? And are you worried about bubbles? We’re still at 7.7 percent unemployment. I mean is the–what do you think?
CHAIRMAN BERNANKE. That’s right. We’re not targeting asset prices. We’re not measuring success by in terms of the stock market. We’re measuring success in terms of our mandate, which is employment and price stability, and that’s what we’re trying to achieve. We do monitor the entire financial system, not just the parts that we supervise or regulate. It includes the stock market and other asset markets. We use a variety of metrics. And I don’t want to now be pulled into going through every individual financial market and assessing it. But in the stock market, you know, we don’t see at this point anything that’s out of line with historical patterns. In particular, you should remember of course that while the Dow may be hitting a high, it’s a nominal term. This is not in real terms. And if you adjust for inflation and for the growth of the economy, you know, we’re still some distance from the high. I don’t think it’s all that surprising that the stock market would rise given that there has been increased optimism about the economy, and the share of income going to profits has been very high. Profit increases have been substantial, and the relationship between stock prices and earnings is not particularly unusual at this point.
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BEN WEYL. Hi, Mr. Chairman. Ben Weyl, Congressional Quarterly. There’s a lot of talk about whether certain institutions are too big to fail. And I wanted to get it a different, if related, question. In 1980, let’s say there was about financial sector comprised about 5 percent of the US Economy, US GDP, now it’s about 9 percent. And I’m wondering if you think that shift is beneficial to the US economy?
CHAIRMAN BERNANKE. I don’t think I know the answer to that question. Certainly, the financial system has–I could argue two ways. I could say, well, the US economy grew pretty well between 1945 and 1975 or 1980. And the financial system was much simpler and didn’t have a lot of exotic derivatives and so on. So that would be argue–that would be one way to argue that maybe, you know, all these extra financial activity is not justified. On the other hand, the world is a lot more complicated. We’re a lot–The world is a lot more international. You have large multinational firms that are connecting resources, savers and investors in different countries. There’s a lot more demand for risk sharing, for liquidity services and so on. So I think based on that and based on the innovations that information technology have created lots of industries, you would expect financial services to be somewhat bigger. So I don’t really know the answer to that question. I think that my predecessor, Paul Volcker’s claim that the only contribution to the financial industry is the Automatic Teller Machine. It might be a little exaggerated. I know that people–some people have that view. Again, I don’t know the answer. I think that a somewhat bigger financial sector can be justified by the wider range of services and the more globalized financial economic system that we have. But the exact number, I can’t really say.
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GREG ROBB. Thank you. There’s been a trend in the last couple of years where the economy kind of jumped out of the gate in the first part of the year only to kind of falter. Is that something that you’re worried about this year? And does that suggest that QE might have to stay kind of at the same pace you are now in some into the third quarter until we’re sure about that trend?
CHAIRMAN BERNANKE. Well, you’re absolutely right that there’s been a certain tendency for a spring slump that we’ve seen a few times. One possible explanation for that-besides some freaky things, some weather events and so on, one possible explanation is seasonality. Because of the severity of the recession in 2007 to 2009, the seasonals got distorted. And they may have led–and I say may because the statistical experts–many of them deny it. But it’s possible that they led job creation and GDP to be exaggerated to some extent early in the year. Our assessment is though that at this point that we’re far enough away from the recession that those seasonal factors ought to be pretty much washing out by now. So if we do in fact see a slump, it would probably be due to real fundamental causes. And then we would obviously have to respond to that. As I said we’re planning to adjust our tools to respond to changes in the outlook. And that can go either direction.
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CATHERINE HOLLANDER. Catherine Hollander from National Journal. You argued in a 1999 paper and a 2002 speech that monetary policy was not the right tool for addressing asset bubbles. But in January, you suggested that there might be a role for it even if not as the first line of defense. Has your thinking on the issue evolved and can you explain why?
CHAIRMAN BERNANKE. Well, I still believe the following which is that monetary policy is a very blunt instrument. If you are raising interest rates to pop an asset bubble, even if you were sure you can do that, you might at the same time be throwing the economy into recession which kind of defeats the purpose of monetary policy. And therefore, I think the first line of defense–I mean, I think, we have a sort of a tripartite lines of defense. We start off with very extensive and sophisticated monitoring at a much higher level and much more comprehensively than we’ve had in the past. Then we have supervision and regulation where we work with other agencies to try to cover all the empty or uncovered areas in the financial system. And then, in addition, we try to use communication and similar tools to effect the way that the financial markets respond to monetary policy. So we do have some first lines of defense which I think should be used first. That being said, you know, I think that given the problems that we’ve had not just in the United States, but globally in the last 15, 20 years, that we need to at least take into account these issues as we make monetary policy. And I think most people on the FOMC would agree with that. What that means exactly depends on the circumstances. I think if the economy is in very weak condition and interest rates are very low for that purpose, it’s very difficult to contemplate raising rates a lot because you’re concerned about some sector in the financial sphere. On the other hand, if you’re in an expansion and there’s a credit boom going on, that–the case in that situation for making policy a little bit tighter might be better. So as I’ve said many times, I have an open mind in this question. We’re learning. All central bankers are learning. But I think I still would agree with the point I made in my very first speech in 2002 as a Governor at the Federal Reserve where I argued that the first line of defense ought to be the more targeted tools that we have including regulatory tools and to some extent macroprudential tools like some emerging markets use.
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PETER COOK. Thank you, Mr. Chairman. As tempted as I might be to end with your NCAA picks or your view of the Nationals, I have something a little more serious for you, in line with what John asked you about your future. Given the unprecedented nature of that policy on your watch and the uncertainty surrounding the exit strategy, to what extent do you feel personally responsible to be at the helm when those decisions are made, and how does that affect your future? And more specifically, sort of the last time we gathered here at the press conference, you were asked if you’d spoken with the President about your future, and you said you hadn’t at that time. Could you at least tell us if you’ve had the conversation?
CHAIRMAN BERNANKE. I’ve spoken to the President a bit, but I really don’t have any-I don’t really have any information for you at this juncture. I don’t think that I’m the only person in the world who can manage the exit. In fact, one of the things that I hope to accomplish and was not entirely successful at as the Governor or as the Chairman of the Federal Reserve was to try to depersonalize, to some extent, monetary policy and financial policy and to get broader recognition of the fact that this is an extraordinary institution. It has a large number of very high quality policymakers. It has a terrific staff. Literally, dozens of Ph.D. economists who’ve been working through the crisis trying to understand these issues and implement our policy tools, and there’s no single person who is essential to that. But again, with respect to my personal plans, I will certainly let you know when I have something more concrete. Thank you.
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The Special Note summarizes my overall thoughts about our economic situation
SPX at 1549.07 as this post is written