Category Archives: Ben Bernanke

Ben Bernanke’s December 18, 2013 Press Conference – Notable Aspects

On Wednesday, December 18, 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 December 18, 2013, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2013“ (pdf).

From Ben Bernanke’s opening comments

Inflation has been running below the Committee’s longer-run objective of 2 percent. The Committee recognizes that inflation persistently below its objective could pose risks to economic performance and is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over time.

This outlook is broadly consistent with the individual economic projections submitted in conjunction with this meeting by the 17 FOMC participants–5 Board members and 12 Reserve Bank presidents.  As always, each participant’s projections are conditioned on his or her own view of appropriate monetary policy.  FOMC participants generally expect economic growth to pick up somewhat over the next few years.  Their projections for increases in gross domestic product have a central tendency of 2.2 to 2.3 percent for 2013, rising to between 2.8 and 3.2 percent for next year, with similar growth estimates for 2015 and 2016.  Participants see the unemployment rate, which was 7 percent in November, as continuing to decline.  The central tendency of the projections has the unemployment rate falling to between 6.3 and 6.6 percent in the fourth quarter of 2014 and then to between 5.3 and 5.8 percent by the final quarter of 2016.  Meanwhile, FOMC participants continue to see inflation running below our 2 percent objective for a time but moving gradually back toward 2 percent as the economy expands.  The central tendency of their inflation projections for 2013 is 0.9 to 1.0 percent, rising to 1.4 to 1.6 percent for next year and to between 1.7 and 2.0 percent in 2016.

Ben Bernanke’s responses as indicated to the various questions:

STEVE LIESMAN. Steve Liesman, CNBC. Mr. Chairman, thank you. When you say similar moderate steps going forward, is 10 billion an increment that people should anticipate?

And is equal amounts of mortgage-backed securities and Treasuries also what one should anticipate? Finally, when you say well passed the unemployment rate of 6-1/2 percent, why not pick a number? Why say well passed? Thank you.

CHAIRMAN BERNANKE. Sure. On the first issue of 10 billion, again, we say we could take further modest steps subsequently so that would be the general range. But again, I want to emphasize that we are going to be data dependent. We could stop purchases, if the economy disappoints. We could pick them up somewhat, if the economy is stronger.

In terms of MBS versus Treasuries, we discussed that issue. I think that the general sense of the Committee was that equal reductions are approximately equal reductions was the simpler way to do this. It obviously doesn’t make a great deal of difference in the end to how much we hold. So that was going to be our strategy. On the issue, another number, the unemployment rate-let’s talk first about the labor market condition. The unemployment rate is a good indicator of labor market. It’s probably the best single indicator that we have. And so we were comfortable setting a 6.5 percent unemployment rate as the point at which we would begin to look at a more broad set of labor market indicators. However, precisely because we don’t want to look just at the unemployment rate, we want to–once we get to six and a half, we want to look at hiring, quits, vacancies, participation, long-term unemployment, et cetera, wages. We couldn’t put it in terms of another unemployment-rate level specifically. So, I expect there would be some time past the 6-1/2 percent before all of the other variables that we’re looking at will line up in a way that will give us confidence that the labor market is strong enough to withstand the beginning of increases in rates.

The SEP, the Survey of Economic Projections, which were distributed, obviously that’s individual assessments and not the Committee’s collective view. But nevertheless, it gives you some sense of current expectations about the length of time. The SEP shows that the 6.5 percent is expected by a large number of people to be reached about the end of next year, end of 2014. And then the first rate increases according to the so-called “Dot’s Chart” take place near the end of 2015. So that’s the order of the magnitude I think that people are currently expecting, but again I want to emphasize that it will depend on our–being persuaded that over across the broad range of indicators, the labor market is sufficiently strong that we could begin to withdraw accommodation.


ROBIN HARDING. Robin Harding from the Financial Times. Mr. Chairman, your

inflation forecasts never get back to two percent in the time horizon that you cover here at 2016. Given that, why should we believe the Fed has a symmetric inflation target and in particular, why should we believe you’re following an optimal policy, optimal-controlled policy as you said in the past given that that would imply inflation going if it’s above target at some point? Thank you.

CHAIRMAN BERNANKE. Well again, these are individual estimates, lot, big, standard errors implicitly around them and so on. We do think that inflation will gradually move back to 2 percent and we allow for the possibility as you know in our guidance that it could go as high as 2-1/2 percent. Even though inflation has been quite low in 2013, let me give you the case for why inflation might rise.

First, there are some special factors such as health care costs and some other things that have been unusually low and might be reversed. Secondly, if you look at the fundamentals for inflation, including inflation expectations be it measured by financial markets or surveys; if you look at growth which we now anticipate we’ll be picking up both in the US and internationally; if you look at wages which have been growing at 2 percent and a little bit higher according to many indicators. All these things suggest that inflation will gradually pick up. But what I tried to emphasize in my opening remarks which is clear in our statement is that we take this very seriously. It’s not easy to–inflation cannot be picked up and move where you want it. It takes–it requires obviously some luck and some good policy. But we are very committed to making sure that inflation does not stay too low and we are continuing to monitor that very carefully and to take whatever actions necessary to achieve that.

ROBIN HARDING. And then optimal control.

CHAIRMAN BERNANKE. With even under optimal control, it would take a while for inflation. Inflation is quite–can be quite inertial, can take by the time to move. And the responsiveness of inflation to increasing economic activity is quite low. So, and it particularly given that environment where we have falling oil prices and other factors that are contributing downward forces on inflation. It’s difficult to get inflation to move–move quickly to target but we are again committed to doing what’s necessary to get inflation back to target over the next couple of years.


CRAIG TORRES. Craig Torres from Bloomberg News. There’s been a great deal of discussion in your profession about the potency of policy at the zero boundary. And to kind of bounce off Robin, it’s very striking that inflation is falling while QE3 has been in place, and the economy continues to undershoot the FOMC’s forecast. So, I guess the simple question is, are you giving up, you know, I mean, have you reached the limit of your policy tools and is there nothing more you can do? The economy is still running way below the trend line that existed before the financial crisis.

CHAIRMAN BERNANKE. Well, everything depends on what benchmark you compare it to, as you know. I said last year that monetary policy was not a panacea. It couldn’t solve all our problems. And in particular, it can’t do anything about a slowing in potential growth which appears to happen at least to some extent. It can’t do much or anything about fiscal policy which is working in quite the opposite direction. So, given those things, I think the outcomes we had are perhaps not as bad as you would–might think. In particular, as I’ve mentioned many times, the Congressional Budget Office assessed the fiscal drag in 2013 has been by one and a half percentage points of growth. We’re looking like we’re going to get in the low two’s actual growth, add those numbers together, it’s kind of a counterfactual. It says the monetary policy appears to have succeeded in offsetting a good bid of that fiscal drag which we were not at all sure that we could accomplish. So, we’re certainly not giving up. We intend to maintain a highly accommodative policy. Nothing that we did today was intended to reduce the combination. We’re still going to buying assets at a high rate and increasing and holding–increasing our balance sheet and holding on to those assets and our guidance today, we strengthen our guidance to make clear that we expect to keep rates low well beyond the point of unemployment rate, six and a half percent.


GREG IP. Greg Ip of the Economist. I have a narrow question and a related broader question. The narrow question is, did the changeover in leadership play any role in the decision on when to begin tapering, i.e. at this meeting? For example, did you have a preference all else equal to get it started before you left? The related broader question is you are a historian of monetary policy. What do you think future historians of monetary policy will have to say about your eight years at the Federal Reserve helm?

CHAIRMAN BERNANKE. The answer to the first question is no. The answer to the second question is I’ll be interested to see. I hope I live long enough to read the textbooks. The-what we’ve showed–there’ve been two big changes; at least more than two, but two that I would cite at the Fed in the last few years, of course, the result in many ways of the crisis. The first is that Federal Reserve has rediscovered its roots, in the sense that the Fed was created to stabilize the financial system in times of panic. And we did that and we used tools that were analogous in spirit to what the central banks have done for many hundreds of years, but of course, adapted to a modern financial system.

The other thing that was unique about it–maybe not completely unique, but largely unique about this period was that we were trying to help the economy recover from a deep recession at a time when interest rates were almost or essentially zero. And that required us to use other methods, most prominently forward guidance and asset purchases, neither of which is entirely new. But clearly this is–unless you put aside the depression, where monetary policy was, on the whole, pretty passive–this is the first–one of the first examples at least of aggressive monetary policy taking place in a near zero interest rate environment. Now we’re seeing, of course, Japan and UK and other countries also taking similar types of approaches. And I think that will be an issue, an area that monetary historians will be interested in exploring, as well as monetary theorists and empirical studies.


BINYAMIN APPELBAUM. Some members of your staff published a paper earlier this fall arguing that in times of high unemployment–and particularly when some of that unemployment is calcifying into disengagement–there’s an argument from monetary policy to be even more aggressive. And yet you are now announcing that you’ll do less rather than more. The Fed has done twice before and both times has regretted the decision. Can you talk about why you are not erring on the side of doing more?

CHAIRMAN BERNANKE. Well, again, we’re not doing less. We’ll see how accommodation shapes up. But while we are slowing asset purchases a bit, again we expect total balance sheet to be quite large and maintained for–at a large level for a long time. And we expect to keep rates low for a very long time. We’re providing a great deal of accommodation to the economy. I agree with your observation and the observation of the paper that you cited that there is a case we’re being particularly aggressive, and I think we have been aggressive to try to keep the economy growing, and we are seeing progress in the labor market. So I would dispute the idea that we’re not providing a lot of accommodation to the economy.


WYATT ANDREW. Mr. Chairman, thank you. Wyatt Andrews at CBS. Given the billions of dollars that the Fed has put into the economy over the years, do you see a leading reason why the economy has not created more jobs?

CHAIRMAN BERNANKE. So, we’ve been in a–it’s been about a little over four years now since the recovery began, four and a half years. It’s been a slow recovery. There are a number of reasons for that, it’s–of course, that’s something for econometricians and historians to grapple with. But there have been a number of factors which have contributed to slower growth. And they include, for example, the observation of financial crises tend to disrupt the economy, may affect innovation. New products, new firms. We had a big housing bust, and so, the construction sector, of course, has been quite depressed for awhile. We’ve had continuing financial disturbances in Europe and elsewhere. We’ve had a very tight, on the whole–except for in 2009–we had very tight fiscal policy. People don’t appreciate how tight fiscal policy has been. At this stage in the last recession, which was a much milder recession, state, local, and federal governments had hired 400,000 additional workers from the trough of the recession. At the same point in this recovery, the change in state, local, and federal government workers is minus 600,000. So there’s about a million workers difference in how many people are–been employed at all levels of government. So, fiscal policy has been tight, contractionary, so there have been a lot of headwinds. All that being said, we have been disappointed in the pace of growth, and we don’t fully understand why. Some of it may be a slower pace of underlying potential, at least temporarily. Productively has been disappointing. It may be that there’s been some bad luck, for example, the effects of the European crisis and the like. But compared to other advanced industrial countries–Europe, UK, Japan–compared to other countries and vast industrial countries recovering from financial crises, the U.S. recovery has actually been better than most. It’s not been good, it’s not been satisfactory. Obviously, we still have a labor market where it’s not easy for people to find work. A lot of young people can’t get the experience and entree into the labor market. But, I think, given all of the things that we faced, it’s perhaps–at least in retrospect–not shocking that the recovery has been somewhat tepid.


PETER COOK. Peter Cook of Bloomberg Television. Mr. Chairman, first of all, thank you for holding these news conferences. I hope you encourage your successor to have even more of them.

One thing I know you’re going to miss is traveling to Capitol Hill to testify, and one thing that’s going to be happening next year, according to the Chairman of the House Financial Services Committee, is a full review of the Federal Reserve–even the Federal Reserve Act, the structure of the Fed, the mission of the Fed, and the mandate of the Fed. And I wanted to see if you might be willing to impart some final words of wisdom to members of Congress as they consider possible legislative changes. What, if anything, could they do to the structure of the Federal Reserve, the mandate of the Federal Reserve, the dual mandate, that might help Fed policy makers in the future? Do you think the dual mandate still is merited? And just a final question for you, sir, as you get set to leave and perhaps your last news conference here–you talked a little bit about your frustrations, the headwinds that you faced through the course of your eight years. Is there a decision–with the benefit of hindsight–that you would do differently, one change perhaps in a decision-making process that you’ve made, your fellow colleagues have made here, that you think would have made a difference materially over the last eight years?

CHAIRMAN BERNANKE. Well, on the centennial review, let me just say first that one of the things that I’m proud of and I’ve tried to accomplish over the past eight years is to increase the transparency of the Fed and to increase the accountability of the Fed. You mentioned those trips to Capitol Hill. I’ve testified many times, as have a number of my colleagues.

There is this notion of the Fed is not audited, or it has all kinds of secret books–all these things. As you well know, we have complete openness to the General Accountability Office, the GAO–Government Accountability Office. We have an IG, Inspector General, of our own. We have our private accounting firm that does all the books as well under very tough standards. We publish regular reports in all aspects of our operations. So we’re very open, and we are by all means willing to work with Congress to see if there’s anything they think might be done better or in a more effective way. So we’re open to doing that.

I hope that those reviewing the central bank will, of course, recognize that central banking is an old activity. The 17th century is when the Swedish Riksbank and the Bank of England began operation, so we know a lot about central banking. There are a lot of experts on central banking, a lot of experts on monetary policy. Every major country has a central bank. So we’re not starting from scratch. I mean, there’s a lot of people with a lot of expertise on this, and I hope that as we talk about these issues that we are bringing in serious people who understand these issues and who can make good suggestions.

Now, there are a range of different mandates around the world. There are some single mandates. There are some dual mandates, et cetera. It’s our sense that the dual mandate has served us well here, in particular that the Fed has been able at times to speed the recovery from recession and help put people back to work more quickly. Of course, we can’t do anything about long-run employment opportunities, but we can help the economy recovery more quickly. So I think that that’s valuable. I would note, by the way, that at the current moment, it doesn’t really matter whether we have one mandate or two, because we’re below our inflation target and we-unemployment is above where we’d like it to be. So both sides of our mandate are pointing exactly in the same direction, which is to provide strong accommodation to the economy to help it recover.

Looking in retrospect I, you know, this–that’s a very hard question. Every decision you make, of course, is done in real time with deficient information and whatever you know at the time and whatever the experts are telling you about any particular issue. Obviously, we were slow to recognize the crisis. I was slow to recognize the crisis. In retrospect, it was a traditional classic crisis, but in a very, very different guise: different types of financial instruments, different types of institutions, which made it, for a historian like me, more difficult to see. Whether or not we could have prevented or done more about it, that’s another question. You know, by the time I became Chairman, it was already 2006, and house prices were already declining. Most of the mortgages had been made, but obviously, it would have been good to have recognized that earlier and try to take a more preventive action. That being said, we’ve done everything we can think of essentially to strengthen the Fed’s ability to monitor the financial markets, to take actions to stabilize the economy in the financial system. So I think going forward, we’re much better prepared for–to deal with these kinds of events than we were when I became Chairman in 2006.


STEVE BECKNER. Steve Beckner of MNI. Mr. Chairman, it’s been a pleasure covering you. One of the factors that your policy statement says will be considered in assessing the future pace of asset purchases is the cost and efficacy of those purchases. To what extent has the–or you might say cost and benefits–to what extent has that calculation already changed? To what extent that did that affect today’s decision? And going forward, looking on the cost side, somebody else mentioned bubbles. Not just bubbles but to what extent will, you know, the whole consideration of threats to financial stability come into play as well as the potential for losses on the Fed’s own portfolio?

CHAIRMAN BERNANKE. So I will answer your question and try and help maybe do a better job on Binya’s question as well. We do think again of the asset purchases as a secondary tool behind interest rate policy, and we do think that the cost-benefit ratio, particularly as the assets on the balance sheet get large, that it moves in a way that’s less favorable. The cost involved include, you know, managing the exit from that. The possible–it’s very unlikely that the Fed will have losses in any comprehensive sense. We’ve already put $350 billion of profits back to the Treasury since 2009, which is about as much as we delivered to the Treasury between 1990 and 2007 combined. So, over any period of time, clearly the Fed is actually making a good bit of money for the taxpayer and for the government, but it could be that if interest rates rise quickly, for example, that we would be in a situation of not giving remittances to the Treasury for a couple of years, and that would create problems no doubt for the Fed in terms of Congressional response.

There are issues of how well we understand and can manage the effects of asset purchases. I think, for example, that an important difference between asset purchases and interest rate policy is that asset purchases work by affecting what is called a term premium, which is essentially the additional part of the interest rate which investors require as compensation for holding longer-term securities. We just don’t understand very well, and I say we, I mean the economic profession, don’t understand very well what moves the term premium. And so, we sa-last summer, we saw a very big jump in the term premium that was very destabilizing and created a lot of stress in financial markets. So there are a number of reasons why asset purchases, while effective, while I think they have been important, are less attractive tools than traditional interest rate policy, and that’s the reason why we have relied primarily on interest rates, but used asset purchases as a supplement when we’ve needed it to keep forward progress.

I think that, you know, obviously there are some financial stability issues involved there. We look at the possibility that asset purchases have led to bubbly pricing in certain markets or in excessive leverage or excessive risk taking. We don’t think that that’s happened to an extent, which is a danger to the system, except other than that when those positions unwind, like we saw over the summer, they can create some bumpiness in interest rate markets in particular. Our general philosophy on financial stability issues is where we can, that we try to address it first and foremost by making sure that the banking system and the financial system are as strong as possible. If banks have a lot of capital, they can withstand losses, for example. And by using whatever other tools we have to try to avoid bubbles or other kinds of financial risks. That being said, I don’t think that you can completely ignore financial stability concerns in monetary policy, because we can’t control them perfectly, and there may be situations when financial instability has implications for our mandate, which is jobs and inflation, which we saw of course in the Great Recession. So it’s a very complex issue. I think it would be many years before central banks have completely worked out exactly how best to deal with financial instability questions. Certainly, the first line of defense for us is regulatory and other types of measures, but we do have to pay some attention to that. I would say at this point though that the asset purchases program, the last one, is well on its way to meeting our economic objective, and I am very pleased that we’re able to over time wind down this program, slowing the pace of purchases on current plans, because we reached our objective, rather than because the costs or efficacy issues became important. So I think that in this case that’s not a concern at this juncture with respect to this program.


ANNALYN KURTZ. Annalyn Kurtz with CNN. I recall in Jackson Hole last year, you cited a study that said the first $2 trillion on asset purchases had boost the GDP by about three percent and increased private sector employment by two million jobs. Now, your balance sheet is near in $4 trillion, and I’m wondering: Do you feel the third round of asset purchases packed as much bang for your buck? And do you still think the first study offered a reasonable estimate?

CHAIRMAN BERNANKE. Well, it’s very hard to know–in terms of the study, it’s very hard to know. It’s imprecise science try to measure these effects. You have to obviously ask yourself, you know, what would have happened in the absence of the policy? I think that study, I think was a very interesting study, but it was on the upper end of the estimates that people have gotten in a variety of studies looking at the effects of the asset purchases.

That being said, I’m pretty comfortable with the idea that this program did in fact create jobs. I cited some figures. To repeat one of them, the Blue Chip forecasts for unemployment in this current quarter made before we begin our program were on the order 7.8 percent, and that was before the fiscal cliff deal, which even–created even more fiscal headwinds for the economy. And of course, we’re now at 7 percent. I’m not saying that the asset purchases made all that difference, but it made some of the difference, and I think it has helped create jobs.

And you can see how it works, I mean the asset purchases brought down long-term interest rates, brought down mortgage rates, brought down corporate bond deals, brought down car loan interest rates, and we’ve seen the response in those areas as the economy has done better. Moreover again, this is been done in the face of very tight, unusually tight fiscal policy for a recovery period. So I do think it’s been effective, but the precise size of the impact is something I think that we can very reasonably disagree about, and that work will continue on. As I said before, the uncertainty about the impact and the uncertainty about the effects of ending programs and so on is one of the reasons why we have treated this as a supplementary tool rather than as a primary tool.


MURREY JACOBSON. Hi. Murrey Jacobson with The NewsHour. On the question of longer-term unemployment and the drop in labor force participation, how much do you see that as the result of structural changes going on in the economy at this point? And to what extent do you think government can help alleviate that in this environment?

CHAIRMAN BERNANKE. I think a lot of the declines in the participation rate are in fact demographic or structural reflecting sociological trends. Many of the changes that we’re seeing now, we were also seeing to some degree even before the crisis, and we have a number of staffers here at the Fed who have studied participation rates and the like. So I think a lot of the unemployment decline that we’ve seen, contrary to sometimes what you hear, I think a lot of it really does come from jobs as opposed to declining participation.

That being said, there certainly is a portion of the decline in participation, which is related to people dropping out of the labor force, because they are discouraged, because their skills have become obsolete, because they’ve lost attachment to the labor force and so on. The Fed can address that to some extent if–you know, if we’re able to get the economy closer to full employment, then some people who are discouraged or who have been unemployed for a long time might find that they have opportunities to rejoin the labor market.

But I think fundamentally that training our workforce to fit the needs of 21st-century industry in the world that we have today is the job of both the private educational sector and the government educational sector. We have many strengths in our educational sector including outstanding universities but we have a lot of weaknesses as you know. There are many, many factors that affect participation, employment, wages, and so on, but the one I think that we can most directly affect is the skill level of our workforce. And that doesn’t mean everybody has to go to get a PhD. People have different needs, different interests. But that I think is one of the biggest challenges that our society faces, and if we don’t address it, then we’re going to see a larger and larger number of people who are either unemployed, underemployed or working at very low wages, which obviously is not something we want to see.

Thank you.



The Special Note summarizes my overall thoughts about our economic situation

SPX at 1828.57 as this post is written

Ben Bernanke’s September 18, 2013 Press Conference – Notable Aspects

On Wednesday, September 18, 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 September 18, 2013, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2013” (pdf).

From Ben Bernanke’s opening comments:

In the Committee’s assessment, the downside risks to growth have diminished, on net, over the past year, reflecting, among other factors, somewhat better economic and financial conditions in Europe and increased confidence on the part of households and firms in the staying power of the U.S. recovery.  However, the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market.  In addition, federal fiscal policy continues to be an important restraint on growth and a source of downside risk.

Apart from some fluctuations due primarily to changes in oil prices, inflation has continued to run below the Committee’s 2 percent longer-term objective.  The Committee recognizes that inflation persistently below its objective could pose risks to economic performance, and we will continue to monitor inflation developments closely.  However, the unwinding of some transitory factors has led to moderately higher inflation recently, as expected; and, with longer-term inflation expectations well-anchored, the Committee anticipates that inflation will gradually move back toward 2 percent.


At the meeting concluded earlier today, the sense of the Committee was that the broad contours of the medium-term economic outlook—including economic growth sufficient to support ongoing gains in the labor market, and inflation moving toward its objective—were close to the views it held in June.  But in evaluating whether a modest reduction in the pace of asset purchases would be appropriate at this meeting, however, the Committee concluded that the economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such a reduction.  Moreover, the Committee has some concern that the rapid tightening of financial conditions in recent months could have the effect of slowing growth, as I noted earlier, a concern that would be exacerbated if conditions tightened further.  Finally, the extent of the effects of restrictive fiscal policies remains unclear, and upcoming fiscal debates may involve additional risks to financial markets and to the broader economy.  In light of these uncertainties, the Committee decided to await more evidence that the recovery’s progress will be sustained before adjusting the pace of asset purchases.

Bernanke’s responses as indicated to the various questions:

PEDRO DA COSTA. Thanks, Mr. Chairman. Pedro da Costa from Reuters. You cite meaningful progress on the labor market both on the unemployment front and in terms of payroll growth. But much of the decline in the unemployment rate has been due as you know to the decline in participation. So my question to you is and also on the payroll front, some people would argue that, while there has been growth, it hasn’t been strong enough to keep up with population growth and make up the gap that we have from the recession. So, how high do you think the jobless rate would be if it were not for the decline in participation? I’ve heard estimates as high as 10 to 11 percent. And could you put the labor market in that context?

CHAIRMAN BERNANKE. Certainly. So, I think there is a cyclical component to participation and in that respect, the unemployment rate understates the amount of sort of true unemployment if you will in the economy. But on the other hand, there is also a downward trend in participation in our economy which is arising from factors that have been going on for some time including an aging population, lower participation by prime-age males, fewer women in the labor force, other factors which aren’t really related to this recession.

Over the last year, the unemployment rate has dropped by eight-tenths of a percentage point. The participation rate is dropped by three-tenths of a percentage point, which is pretty close to the trend. So in other words, I think it would be fair to say that most of the improvement in the unemployment rate, not all, but most of it in the last year is due to job creation rather than lower participation. I would also note that if you look at the broader measures of unemployment that the BLS publishes including part-time work, including discouraged workers and so on, you’ll see that those rates have fallen about the same amount as the overall standard civilian unemployment rate. So, I think that there has been progress and it’s obscure to some extent by the downward trend in participation. But I also would agree with you that the unemployment rate is, while perhaps the best single indicator of the state of labor market is not by itself a fully representative indicator.


JON HILSENRATH. Jon Hilsenrath from the Wall Street Journal. Just to follow up on Binya’s question, Mr. Chairman, you said that you could pullback the purchases possibly later this year. You sound a little bit less certain that it’s going to happen later this year. So I’d like you–to ask you to talk a little bit more about your conviction about whether these are like–the pullback is likely to start this year, where you stand on that. And I also don’t think I heard you mentioned that 7 percent unemployment number that you’ve talked–you talked about back in June. That was the rate that was–the unemployment rate that was supposed to prevail when the Fed was done doing this, is that no longer operative?

CHAIRMAN BERNANKE. So, there is no fixed calendar—a schedule, I really have to emphasize that. If the data confirm our basic outlook, if we gain more confidence in that outlook, and we believe that the three-part test that I mentioned is indeed coming to pass, then we could move later this year. We could begin later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy. So we are tied to the data, we don’t have a fixed calendar schedule, but we do have the same basic framework that I described in June.

The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market. Last time, I gave a 7 percent as an indicative number to give you some sense of, you know, where that might be. But as my first answer suggested, the unemployment rate is not necessarily a great measure in all circumstances of the–of the state of the labor market overall. For example, just last month, the decline in unemployment rate came about more than entirely because declining participation, not because of increased jobs. So, what we will be looking at is the overall labor market situation, including the unemployment rate, but including other factors as well. But in particular, there is not any magic number that we are shooting for. We’re looking for overall improvement in the labor market.


ANNALYN KURTZ. Annalyn Kurtz with CNNMoney. This week marks five years since the financial crisis began, and Hank Paulson, who you worked very closely with, has said his biggest regret was that he wasn’t able to convince the American people that what was done– the bank bailouts–weren’t from Wall Street, they were from Main Street. What is your biggest regret as you reflect on the five-year anniversary? And do you believe that the Fed, Congress, and the President have put the necessary measures in place to prevent another deep financial crisis?

CHAIRMAN BERNANKE. Well, on regrets, as Frank Sinatra says, I have many. I think my–you know, reasonably, the biggest regret I have is that we didn’t forestall the crisis. I think once the crisis got going, it was extremely hard to prevent. You know, I think we did what we could, given the powers that we had, and I would agree with Hank that we were motivated entirely by the interest of the broader public, that our goal was to stabilize the financial system so that it would not bring the economy down, so that it would not create massive unemployment and economic hardship that was even more–that would be–would have been even more severe by many times than what we actually saw. So, I agree with him on that, and I guess, since you gave me the opportunity, I would mention that, of course, all the money that was used in those operations has been paid back with interest. And so, it hasn’t been costly even from a fiscal point of view. Now, in terms of progress, that’s a good question. I think we made a lot of progress. We had, of course, the Dodd-Frank law passed in 2010, and then we recently, you know, have come to agreement internationally on a number of measures, including Basel III and other agreements relating to the shadow banking system and other aspects of the financial system. I think that our-today, our large financial firms, for example, are better capitalized by far than they were certainly during the crisis and even before the crisis. Supervision is tougher. We do stress testing to make sure that firms can withstand not only normal shocks but very, very large shocks, similar to those they experienced in 2008. And very importantly, of course, we now have a tool that we didn’t have in 2008–which would have made, I think, a significant difference if we had had it-which is the Orderly Liquidation Authority that the Dodd-Frank bill gave to the FDIC in collaboration with the Fed. Under the Orderly Liquidation Authority, the FDIC, with other agencies, has the ability to wind down a failing financial firm in a way that minimizes the direct impact on the financial markets and on the economy. Now, I should say, I don’t want to overstate the case, I think there’s a lot more work to be done. In the case of resolution regimes, for example, the United States has set the course internationally. Other countries and international bodies like the FSB are setting up standards for resolution regimes, which are very similar to those of the United States, which is going to make for better cooperation across borders. But we’re still some distance from being fully geared up to work with foreign counterparts to successfully wind down international–multinational financial firm. And that’s–we’ve made progress in that direction, but we need to do more, I think. So, I think there’s more to be done. There’s more to be done on derivatives, although a lot has been done to make them more transparent and to make the trading of derivative safer. But it’s going to be probably some time before, you know, all of this stuff that has been undertaken, all of these measures are fully implemented. And we can assess, you know, the ultimate impact on the financial system.


STEVE BECKNER. Steve Beckner of MNI. Mr. Chairman, a number of economists, and indeed, some of your Fed colleagues, have argued that the effectiveness of quantitative easing has greatly diminished, if not disappeared, and they point to the recent performance of the economy as proof of that. And there have been a number of people who have argued that there are regulatory and other impediments to growth beyond the reach of monetary policy. To what extent are these valid arguments? And if the economy does not speed up, that does not reach your objectives, how will you ever get out of quantitative easing?

CHAIRMAN BERNANKE. Well, on the effectiveness of our asset purchases, it’s difficult to get a precise measure. There’s a large academic literature on this subject, and they have a range of results, some suggesting that this is a quite powerful tool, some that it’s less powerful. My own assessment is that it has been effective. If you look at the recovery, you see that some of the strongest sectors, the leading sectors like housing and autos, have an interest sensitive sectors. And that these policies have been successful in strengthening financial conditions, lowering interest rates, and thereby promoting recovery. So I do think that they have been effective. You mentioned that there hasn’t been any progress. There has been a lot of progress, as I said at the beginning. Labor market indicators, while still not where we’d like them to be, are much better today than they were when we began this latest program a year ago. And importantly, as actually is referenced in our FOMC statement, that happened notwithstanding a set of fiscal policies which the CBO said would cost between one and one and a half percentage points of real growth and hundreds of thousands of jobs. So, the fact that we have maintained improvements in the labor market that are as good or better than the previous year, notwithstanding this fiscal drag, is some indication that there is at least a partial offset from monetary policy. Now, just as you say, there are a lot of things in the economy that monetary policy can’t address. They include the effectiveness of regulation, they include fiscal policy, they include developments in the private sector. We do what we can do and what–if we can get help, we’re delighted to have help from other policymakers and from the private sector and we hope that that will happen. The criterion for ending asset purchases is not, you know, some very high rate of growth. What it is, is the criterion–let me just remind you, the criterion is a substantial improvement in the outlook for the labor market and we have made significant improvement. Ultimately, we will reach that level of substantial improvement and at that point, we will be able to wind down the asset purchases. Again, you know, and I think people don’t fully appreciate that we have two tools: We have asset purchases and we have rate policy and guidance about rates.

It’s our view that the latter, the rate policy, is actually the stronger, more reliable tool. And when we get to the point where we can, you know, where we are close enough to full employment, that rate policy will be sufficient, I think that we will still be able to provide–even if asset purchases have reduced–we will still be able to provide a highly accommodative monetary background that will allow the economy to continue to grow and move towards full employment.


PETER COOK. Peter Cook at Bloomberg Television. Mr. Chairman, one of my colleagues was remarking as we came in here, we don’t often get surprises from the Federal Reserve. This was a surprise, you talked about–you hadn’t telegraphed anything specifically, but you’ve seen the market reaction, I’m sure. My question for you is, were you intending a surprise today, and did you get the intended result judging from the market reaction? And related to that, by taking this action today, continuing the bond purchases going forward. At what point do you believe you’re starting to complicate the exit strategy? Simply by continuing to keep the Fed’s foot on the gas pedal, do you make life more complicated for the Federal Reserve down the road?

CHAIRMAN BERNANKE. Well, it’s our intention to try to set policy as appropriate for the economy, as I said earlier. We are somewhat concerned. I won’t overstate it, but we do want to see the effects of higher interest rates on the economy, particularly in mortgage rates on housing. So to the extent that our policy makes conditions–our policy decision today makes conditions just a little bit easier, that’s desirable. We want to make sure that the economy has adequate support and in particular, is less surprising the market or easing policy as it is avoiding a tightening until we can be comfortable that the economy is in fact growing, you know, the way we want it to be growing. So, this was a step–it was a step, a precautionary step if you will. It was a–the intention is to wait a bit longer and to try to get confirming evidence whether to these-to whether or not the economy is, in fact, conforming to this general outlook that we have. I don’t think that we are complicating anything for future FOMCs. It’s true that the assets that we’ve been buying add to the size of our balance sheet. But we have developed a variety of tools, and we think we have numerous tools that we–can be used to both manage interest rates and to ultimately unwind the balance sheet when the time comes. So I, you know, I’m–I feel quite comfortable that we can, in particular, that we can raise interest rates at the appropriate time, even if the balance sheet remains large for an extended period. And that will be true of course for, you know, future FOMCs as well.


DON LEE. Don Lee, L.A. Times. As you may know, the Census Bureau reported yesterday that poverty rate and the median household income saw no improvement last year. And I wonder when you see median income is turning up significantly for most people, and in light of the fact that people in the middle and the bottom have seen very little of the gains relative to higher income households, how would you assess the–both quantitative easing and Fed policies?

CHAIRMAN BERNANKE. Sure. So that’s certainly the case that there are too many people in poverty. There are a lot of complex issues involved. There are complex measurement issues, I would just have to mention that. There are a lot of issues that are really long-term issues as well. For example, it might seem a puzzle that U.S. economy gets richer and richer, and yet there are more poor people. And the explanation, of course, is that our economy is becoming more unequal. The more, very rich people and more people in the lower half who are not doing well, these are–there’s a lot of reasons behind this trend, which have been going on for decades, and economists disagree about the relative importance of things like technology and international trade and unionization and other factors that have contributed to that. But I guess my first point is that these long run trends, it’s important to address these trends but the Federal Reserve doesn’t really have the tools to address these long run distributional trends. They can only be addressed really by Congress and by the Administration. And it’s up to them, I think, to take those steps. The Federal Reserve is–we are doing our part to help the median family, the median American, because one of our principal goals, are–we have two principal goals, one is maximum employment, jobs; the best way to help families is to create employment opportunities. We’re still not satisfied, obviously, with where the labor market, the job market is. We’ll continue to try to provide support for that. And then the other goal is price stability, low inflation, which, of course, also helps make the economy work better for people in the middle and the lower parts of the distribution. So, we use the tools that we have. It would be better to have a mix of tools at work, not just monetary policy but fiscal policy and other policies as well. But the Federal Reserve, we can, you know, we only have a certain set of tools and those are the ones that we use. Again, our objective, our objectives of creating jobs and maintaining price stability, I think, are quite consistent with helping the average American, but there’s limits to what we can do about long run trends and I think those are very important issues that Congress and the Administration, you know, need to look at and decide, you know, what needs to be done there.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1714.23 as this post is written

Congressional Accolades For Ben Bernanke

Last week, during his Congressional testimony, Ben Bernanke received various accolades from members of Congress.

While the official transcript is not yet available, the Wall Street Journal, in a July 19 Real Time Economics post titled “Congress Gives Ben Bernanke A Hero’s Send-Off” provides various highlights.

While I don’t necessarily agree with any or all of the following statements from members of Congress below, I do find them notable and post them for reference purposes.

Excerpts from the Real Time Economics post include:

In Mr. Bernanke’s two days of delivering the Fed’s semi-annual monetary policy report to Congress, at least 13 members of the House Financial Services Committee and seven members of the Senate Banking Committee prefaced their questions to Mr. Bernanke by thanking him for steering the economy through the Great Recession and its aftermath.

“You acted boldly, decisively and creatively,” Rep. Jeb Hensarling (R., Texas) told Mr. Bernanke Wednesday. “Under your leadership, the Fed took a number of actions that certainly staved off even worse economic” pain, said Mr. Hensarling, who is chairman of the House committee and has been an outspoken critic of some Fed policies.


Sen. Pat Toomey (R., Pa.), who has offered his share of criticism about U.S. economic policy in recent years, told Mr. Bernanke: “Your quiet but strong leadership has been instrumental in keeping our economy from falling into an abyss and repeating the devastation of a Great Depression. And we are now, because of your leadership, on the path towards turning the economy around.”


Sen. Charles Schumer (D., N.Y.) told Mr. Bernanke that 2014 and 2015 “will be stronger economically than our present time, and that will be in large part because of the building blocks that you put into place, even if you’re no longer chairman of the Fed.”


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1692.09 as this post is written

Potential Losses In The Federal Reserve’s Portfolio

I have written extensively on the issue of Quantitative Easing (QE) and Interventions as I believe many aspects of these practices lack recognition and understanding.   Quantitative Easing in general carries an array of risks, detrimental impacts, unintended consequences, and complex impacts on the economy and markets.

One such set of dynamics embedded within QE that I believe lacks recognition is the risk of losses that can occur in the Federal Reserve’s portfolio.  I previously wrote of this in the post of March 7, 2012 titled “Dynamics And Risks Of The Federal Reserve’s Portfolio.”

While the subject of potential losses is complex – and quantification of such potential losses is made difficult due to the many factors involved – the sheer size of the numbers involved, as well as various adverse situations that may develop during the course of portfolio losses – make this an issue that deserves recognition.

It should be noted that various parties believe that numerous mitigating factors minimize the importance of the potential for losses from the Fed’s portfolio.  For instance,  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 U.S. Treasury can always replenish the capital.  As well, there is the issue of “mark to market” losses vs. accounting losses, and how the markets view the difference.  (Note:  as seen in the FRBSF Economic Letter of April 11, 2011:  “…the Fed values its securities at acquisition cost and registers capital gains and losses only when securities are sold. Such historical-cost accounting is considered appropriate for a central bank that is motivated by macroeconomic policy objectives rather than financial profit and is consistent with the buy-and-hold securities strategy the Fed has traditionally followed.”)  Other mitigating factors are cited as well, including reasoning cited by the Federal Reserve in the above-mentioned March 7, 2012 blog post.

However, if one believes that there is possible adverse impact(s) stemming from mark-to-market losses in the Federal Reserve’s portfolio as well as the exhaustion of the Federal Reserve’s capital, a disconcerting picture appears, especially in today’s rising interest rate environment.

Subsequent to my March 7, 2012 blog post, there have been some published analyses that attempt to quantify the potential for losses in the Federal Reserve’s portfolio.  Two of these include the January 2013 Federal Reserve paper titled “The Federal Reserve’s Balance Sheet and Earnings:  A primer and projections,” (discussed in the Wall Street Journal article of January 30, 2013 titled “Fed Risks Losses From Bonds“) as well as the Bloomberg article of February 26, 2013 titled “Fed Faces Explaining Billion-Dollar Losses in QE Exit Stress.”

While this Bloomberg article contains various interesting commentary, the following excerpts are especially notable:

MSCI’s data showed the greatest losses under the adverse scenario, as 10-year Treasury yields jump to 5.4 percent by the end of 2015 and three-month rates rise to 4 percent. The 10-year yield was 1.86 percent yesterday, and the three-month rate was 0.117 percent.


Losses on the Fed’s portfolio rise steadily under the adverse scenario to $547 billion by the fourth quarter of 2015 in the MSCI analysis, which is purely a measure of interest-rate risk in the portfolio starting from bond prices at year end. It does not take account of purchases or sales the Fed may conduct in the future. The calculations are mark-to-market losses on the portfolio that take account of yield, amortization, accretion, and funding costs.

Also of critical importance is how sensitive the Federal Reserve’s asset portfolio is to an increase in interest rates before the capital base is exhausted.  Cumberland Advisors publishes a CUMB-E Index (pdf) described as a measure of “Percentage  point parallel shift in yield curve needed to exhaust Federal Reserve capital account.”  This CUMB-E Index value as of June 19 stood at .27.  (also of note is Cumberland’s “Total Assets Of Major Central Banks” (pdf) which shows the size, trends, and composition of major Central Bank assets.)

In aggregate, my interpretation of this potential for losses in the Federal Reserve’s portfolio is that the portfolio is highly susceptible (on an “all things considered” basis) to large (mark-to-market) losses.   While the amount of these losses depends upon many factors, the overall dynamics of interest rates and their potential for quick and substantial increases serves to further magnify the potential for large losses.

In addition to the direct (mark-to-market) losses, there are also an array of direct and indirect adverse impact(s) these losses can have on the Federal Reserve, U.S. financial standing, and financial markets.  While the extent of these various adverse impacts depends upon many factors, these impacts can cause many highly complex financial and policy problems.

For reference, here is a chart of the 10-Year Treasury Note Yield since 1980, depicted on a monthly LOG basis since 1980 through June 25, 2013, with price labels:

(click on chart to enlarge image)(chart courtesy of; chart creation and annotation by the author)

EconomicGreenfield 6-25-13 TNX Monthly LOG since 1980


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1588.03 as this post is written

Ben Bernanke’s June 19, 2013 Press Conference – Notable Aspects

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.


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


Ben Bernanke’s March 20, 2013 Press Conference – Notable Aspects

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.


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.


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.


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.


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.


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.


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.


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.


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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1549.07 as this post is written

Ben Bernanke’s December 12, 2012 Press Conference – Notable Aspects

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

Ben Bernanke’s September 13, 2012 Press Conference – Notable Aspects

On Thursday, September 13, 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 September 13, 2012, with accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2012” (pdf).

From Ben Bernanke’s opening comments:

As you know, the Federal Reserve conducts monetary policy under a dual mandate from Congress to promote maximum employment and price stability. The United States has enjoyed broad price stability since the mid-1990s and continues to do so today. The employment situation, however, remains a grave concern.


The weak job market should concern every American. High unemployment imposes hardship on millions of people, and it entails a tremendous waste of human skills and talents.  Five million Americans have been unemployed for more than six months, and millions more have left the labor force–many of them doubtless because they have given up on finding suitable work. As the skills of the long-term unemployed atrophy and as their connections to the labor market wither, they may find it increasingly difficult to get good jobs, to their and their families’ cost, of course, but also to the detriment of our nation’s productive potential.


Accordingly, the FOMC decided today on new actions, electing to expand its purchase of securities and extend its forward guidance regarding the federal funds rate. Specifically, the Committee decided to purchase additional agency mortgage–backed securities (MBS) at a pace of $40 billion per month. The new MBS purchases–combined with the existing maturity extension program and the continued reinvestment of principal payments from agency debt and agency MBS already on our balance sheet–will result in an increase in our holdings of longerterm securities of about $85 billion each month for the remainder of the year. The program of MBS purchases should increase the downward pressure on long-term interest rates more generally, but also on mortgage rates specifically, which should provide further support to the housing sector by encouraging home purchases and refinancing.

The Committee also took two steps to underscore its commitment to ongoing support for the recovery. First, the Committee will closely monitor incoming information on economic and financial developments in coming months, and if we do not see substantial improvement in the outlook for the labor market, we will continue the MBS purchase program, undertake additional asset purchases, and employ our policy tools as appropriate until we do. We will be looking for the sort of broad-based growth in jobs and economic activity that generally signal sustained improvement in labor market conditions and declining unemployment. Of course, in determining the size, pace, and composition of any additional asset purchases, we will, as always, take appropriate account of the inflation outlook and of their efficacy and costs.

Bernanke’s responses as indicated to the various questions:

ZACHARY GOLDFARB: Thank you Mr. Chairman. Earlier this year, two occasions, the Fed took policy actions which you defended as extremely important for the economy but as you mentioned, there hasn’t been any improvement in the labor markets since the beginning of the year. Why should people believe this will make a difference? And, the projections seem to suggest it’s approximately a 0.4 reduction on unemployment. Is that the limit of what Fed policies can do going forward?
CHAIRMAN BERNANKE: Well our assessment, I talked about this at my remarks at Jackson Hole. Our assessment and that of the research literature is that the polices we’ve undertaken have had real benefits for the economy, that they have provided some support, that they have eased financial conditions, and help reduce unemployment. All that being said, monetary policy, as I’ve said many times, is not a panacea. It’s not by itself able to solve these problems. We’re looking for policy makers in other areas to do their part. We’ll do our part and we’ll try to make sure that unemployment moves in the right direction but we can’t solve this problem by ourselves.


MIKE MCKEE: You’ve made an eloquent explanation over the past couple of weeks of the Fed’s ability to lower interest rates. But what’s missing for many economists is how the transmission mechanism is going to work. Most people think this will have a minimal effect on rates. Can you give us an idea of how much you think it might push rates down? And why moving rates down a few basis points might change demand which seems to be the problem in the economy?
CHAIRMAN BERNANKE: Well, the ultimate effect is going to depend of course on how much we end up doing and that in turns is going to be depend what the economy does. And this is a conditional program. We’re going to providing accommodation according to how the economy evolves. I think that’s the virtue of putting it this ways is that if the economy is weaker, we’ll provide more support. If the economy strengthens on its own or other head wins die down then it will require less supports. So the amount of support we provide is going to depend on how the economy evolves. We do think that these policies can bring interest rates down. Not just treasury rates but a whole range of rates, including mortgage rates and rates for corporate bonds and other types of important interest rates. It also affects stock prices. It affects other asset prices, home prices for example. So looking at all the different channels of effect, we think it does have impact on the economy, it will have impact on the labor market but as again, the way I would describe it is a meaningful effect, a significant effect but not a panacea, not a solution for the whole issue. We’re just trying to get the economy to move in the right direction to make sure that we don’t stagnate at high levels of unemployment, that we’re making progress towards more acceptable levels of unemployment.


PEDRO DA COSTA: Pedro da Costa from Reuters. My question is I want to go back to the transmission mechanism because speaking to people on the sidelines of Jackson Hole conference that seemed to be the concern about the remarks that you made is that they could clearly see the effect on rates and they could see the effect on the stock market but they couldn’t see how that had helped the economy. So I think there’s a fear that over time, this has been a policy that’s helping Wall Street but not doing that much for Main Street. So could you describe in some detail how does it really different–differ from trickle-down economics where you just pumped money into the banks and hope that they lend?

CHAIRMAN BERNANKE: Well we are–this is a Main Street policy because what we are about here is trying to get jobs going. We are trying to create more employment. We are trying to meet our maximum employment mandate, so that is the objective. Our tools involve, I mean the tools we have, involve affecting financial asset prices and that’s–those are the tools of monetary policy. There are a number of different channels, mortgage rates, I mentioned, other interest rates, corporate bond rates, but also the prices of various assets, like for example, the prices of homes. So the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle. Stock prices, many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend. One of the main concerns that firms have is there is not enough demand, there’s not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better for whatever reason, their house is worth more, they are more willing to go out and spend and that’s going to provide the demand that firms need in order to be willing to hire and to invest.


MARCY GORDON: Marcy Gordon, with the Associated Press. One of the aspects we’ve seen in recent reports on unemployment is the shrinking labor force. Is that something that’s of specific concern to you and what does it tells us about the labor market and the economy?
CHAIRMAN BERNANKE: You–you are absolutely right. And as I mentioned earlier, the–the unemployment decline last month was more than 100 percent accounted for by declines in participation. Some decline in participation is anticipated as is expected. We’re an aging society. We have more–more people retiring. Female participation has flattened out. It hasn’t continued to climb as it did for several decades. We’re seeing less participation among younger people, fewer college students taking part-time jobs and the like. So part of this decline in participation was something that we anticipated quite a long time ago, but part of it is–is cyclical. Part of it reflects the fact that some people–because they have essentially given up or at least are very discouraged have decided to leave the labor force. And the anticipation is that if the economy really were to strengthen, the labor markets were to strengthen at least some of those people would come back in the labor force, they might even temporarily raise the unemployment rate because they’re now looking again. So the participation rate over and above the decline in participation rate over and above the downward trend is just one of the other indicators of a general weak labor market. That’s why I said earlier that we do want to look at a range of indicators, not just the unemployment rate, although that’s a very important indicator, not just payrolls, although that also is a leading indicator, but participation, hours, part-time work and a variety of other measures which suggest that our labor market is still in quite weak condition.

Thank you.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1465.77 as this post is written

Ben Bernanke’s Speech At Jackson Hole – Notable Excerpts

On Friday (August 31) Ben Bernanke gave a speech at Jackson Hole titled “Monetary Policy since the Onset of the Crisis.”

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

These actions–along with a host of interventions by other policymakers in the United States and throughout the world–helped stabilize global financial markets, which in turn served to check the deterioration in the real economy and the emergence of deflationary pressures.

Unfortunately, although it is likely that even worse outcomes had been averted, the damage to the economy was severe.


As the Committee embarked on this path, we were guided by some general principles and some insightful academic work but–with the important exception of the Japanese case–limited historical experience. As a result, central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing.


Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors’ expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about “tail” risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.


How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12  Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13  These effects are economically meaningful.

Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14  The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.

While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual–how the economy would have performed in the absence of the Federal Reserve’s actions–cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15 The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States.16


One possible cost of conducting additional LSAPs is that these operations could impair the functioning of securities markets.


A second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time.


A third cost to be weighed is that of risks to financial stability.


We have seen little evidence thus far of unsafe buildups of risk or leverage, but we will continue both our careful oversight and the implementation of financial regulatory reforms aimed at reducing systemic risk.


A fourth potential cost of balance sheet policies is the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent. Extensive analyses suggest that, from a purely fiscal perspective, the odds are strong that the Fed’s asset purchases will make money for the taxpayers, reducing the federal deficit and debt.27  And, of course, to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial. In any case, this purely fiscal perspective is too narrow: Because Americans are workers and consumers as well as taxpayers, monetary policy can achieve the most for the country by focusing generally on improving economic performance rather than narrowly on possible gains or losses on the Federal Reserve’s balance sheet.


However, following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level, and, although the recent recession was unusually deep, I see little evidence of substantial structural change in recent years.


The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.


Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1406.58 as this post is written

Ben Bernanke’s June 20, 2012 Press Conference – Notable Aspects

On Wednesday, June 20, 2012 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 – 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 20, 2012, with accompanying Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2012 (pdf).

Bernanke’s responses as indicated to the various questions:

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