CHAIRMAN BERNANKE: Good afternoon. Welcome. In my opening remarks I would like to briefly first review today’s policy decision. I’ll turn next to the Federal Open Market Committee quarterly economic projections also being released and I’ll place today’s policy decision in the context of the committee’s projections and Federal Reserve mandate to foster maximum employment and price stability and then I will be glad to take your questions. Throughout the briefing my goal is to reflect the consensus of the committee while taking note of the diversity of views as appropriate. My remarks and interpretations are my own responsibility.
In its policy statement released earlier today the committee announced it is maintaining its existing policy of reinvesting principal payments from securities holdings and second it will complete its planned purchases of $600 billion of long-term security by the end of the quarter. Of course going forward the committee will regularly review the size and composition of the securities holdings in light of incoming information and is prepared to adjust those holds as needed to meet the Federal Reserve mandate. The committee made no change in the target range of the federal fund rate, zero to 1 percent. We anticipate economic conditions including low rates of subdued inflation trends and stable expectations are likely to warrant exceptionally low levels for the feared funds rate for an extended period.
In conjunction with today’s meetings, FOMC participants submitted projections for economic growth, the unemployment rate and the inflation rate for the years 2011 to 2013 and over the longer run. These projections are conditional on each participant’s individual assessment of the appropriate path to monetary policy needed to best promote the committee’s objectives. A table showing the projections has been distributed. I’m going to focus today on the central tendency projections which exclude the three highest and lowest for each variable for each year.
I call your attention first to the committee’s longer run projections which represent participants assessments of the rates to which economic growth unemployment and inflation will converge over time under appropriate monetary policy and assuming no further shocks to the economy. As the table shows, the longer run projections for output growth have a central tendency of 2.5 to 2.8 percent, the same as in the January survey. The longer run projections for the unemployment rate have a central tendency of 5.2 to 5.6 percent, somewhat narrower than in January. These figures may be interpreted as participants current estimates of the economy’s normal trend rate of growth and the normal unemployment rate over the longer run respectively. The economy’s longer term rate of growth in unemployment are determined by nonmonetary factors such as rate of growth of labor force and speed of technological change and it should be noted estimates of these rates are inherently uncertain and subject to revision over time. The central tendency of the longer run projection for inflation is measured by the price index for personal consumption expenditures, 1.7 to 2.0 percent.
In contrast, economic growth in unemployment, the longer run outlook for inflation is determined almost entirely by monetary policy. Consequently, and given that these projections are based on the assumption that monetary policy is appropriate, these longer run projections can be interpreted as indicating the inflation rate that committee participants judge to be most consistent with the Federal Reserve’s mandate to foster maximum employment and stable prices.
At 1.7 to 2.0 percent the mandate consistent rate of inflation is greater than zero for a number of reasons. Perhaps most important, attempting to maintain inflation at zero would increase the risks of experiencing an extended bout of deplages or falling wages and prices which in turn could lead employment to fall below the maximum sustainable level for a protracted period. Hence, the goal of literally zero inflation is not consistent with the Federal Reserve’s dual mandate. Indeed most Central Banks around the world aim to set inflation above zero, usually at about 2 percent.
I turn now to the ext’s economic outlook. As indicated in today’s policy statement the committee sees the economic recovery as proceeding at a moderate pace. Household spending and investment in equipment and software continue ton expand supporting the recovery, but nonresidential investment is weak and the housing sector is depressed. Labor market, overall conditions continue to improve gradually. For example, the unemployment rate moved down a bit further and payroll employment increased in March. New claims for unemployment insurance and indicators of hiring plans are also consistent with continued improvement.
Looking ahead, committee participants expect moderate recovery to continue through 2011 with some acceleration of growth projected for 2012 and 2013. Specifically as the table shows participants projections for output growth have a central tendency of 3.1 to 3.3 percent for this year but rise to 3.3 percent in 2012 and about the same in 2013.
These projections are a little below those made by the committee in January. The mark down of growth in 2011 in particular reflects the somewhat slower than anticipated rate of growth in the first quarter.
The outlook for above trend growth is associated with the projected reduction in unemployment rate which is seen ening down 8.4 to 8.7 percent in the fourth quarter of this year and declining gradually 7.8 to 7.2 percent in 2013, well below the tendency of 5.2 to 5.6 percent.
The projected decline in the unemployment rate is relatively slow, largely because economic growth is projected to be only modestly above the trend growth rate of the economy.
On the inflation front, commodity prices have risen significantly recently, reflecting geo political developments and robust global demand, among other factors. Increases in commodity prices are in turn boosting overall consumer inflation. However, measures of underlying inflation, though having increased modestly in recent months remain subdued and longer term inflation have remained stable. Consequently the committee expects the higher exodety prices to be transitory. As the increases in commodity prices moderate, inflation should decline toward its underlying level. Specifically, participants projections for inflation have a central tendency of 2.1 to 2.8 percent for this year, noticeably higher than in the January projections. Before declining to 1.2 to 2.0 percent in 2012 and running 1.4 to in 2013, both about the same as in January.
The committee’s economic projections provide important context for understanding today’s policy action as well as the committee’s general policy strategy.
Monetary policy affects output and inflation with a lag. So current policy actions must be taken with an eye to the likely future course of the economy. Thus the committee’s projections of the economy, not just current conditions alone, must guide its policy decisions.
The lags with which monetary policy affects the economy also imply that the committee must focus on meeting its mandated objectives over the medium term, which can be as short as a year or two but may be longer depending on how far the economy is initially from conditions of maximum employment and price stability.
To foster maximum employment the committee sets policy to try to achieve sufficient economic growth to return the unemployment rate over time to its long-term normal level. At 8.8 percent the current unemployment rate is elevated relative to that level and progress towards more normal levels of unemployment seems likely to be slow.
The substantial ongoing slack in the labor market and the relatively slow pace of improvement remain important reasons that the committee continues to maintain a highly accommodateive monetary policy. In the medium term the ext seeks to achieve a mandate consistent inflation rate which participants longer term projections for in– is 2 percent or a bit less.
Although the recent surge in commodity prices led to pick up somewhat in the long-term, the committee predicts inflation will return to consistent levels in the medium term as I have discussed. Consequently, the short-term increase in inflation has not prompted the ext to tighten policy at this juncture. Importantly however the committee’s hot look for inflation is presented date indicated on longer term inflation remaining stablement if households and firms expect inflationtor return to a mandate consistent level in the medium term, then increased commodity price are unlikely to produce secondary round effects in which inflation takes hold in non-commodity price and in nominal wages. Thus besides monitoring inflation itself the committee will pay close attention to be inflation expectations and to possible indications of second round effects.
In providing extraordinary monetary policy accommodation in the aftermath of the crisis, the committee has not only reduced the target for federal funds rate to a very low level but also expanded the Federal Reserves balance sheet substantially.
The committee at this meeting continues ongoing discussion of the available tools for removing policy accommodation at such time as that should become appropriate. The committee remains confident that it has the tools that it needs to tighten monetary policy when it is determined that economic conditions warrant such a step.
In choosing the time to begin policy normalization as well as the pace of that normalization, we will carefully consider both parts of our dual mandate. Thank you again and I would be glad to take your questions.
Over here and then we’ll go to Martin.
MALE REPORTER: Mr. Chairman, tomorrow we are going to get a pretty weak GDP number. Your projections have been down graded in this meeting. What do you see as the cause of the weak growth to start the year even with monetary easing and payroll tax cuts? What is yind inbehind the weaker forecast for GDP.
CHAIRMAN BERNANKE: You’re correct, we nt seen the GDP number yetb but we are expecting a relatively weak number for the first quarter, something a little under 2 percent. Most of the factors that account for the slower growth in the first quarter appear to us to be transitory. They include things like, for example, lower defense spending than was anticipated, which presumably will be made up in a later quarter. Weaker exports, given the growth in the global economy. We expect to see that pick up again. And other factors like weather and so on. Now, there are some factors there that may have a longer term implication. For example, construction, both residential and nonresidential was very weak in the first quarter. That may have some implications going forward. So I would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory. That being said, we’ve taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy.
MALE REPORTER: Mr. Chairman, given what you know about the pace of the economy now, what is your best guess for how soon the pedestrian needs to begin to withdraw its extraordinary stimulus for the economy. Could you also say what is your working definition of what extended period means from the purposes of the fed statement?
CHAIRMAN BERNANKE: Well, currently as the statement suggests, we are in a moderate recovery. We will be looking very carefully first to see if that recovery is indeed sustainable, as we believe it is. We will also be looking very closely at the labor market. We have seen improvement in the labor market in the first quarter relative to last year. We would like to see continued improvement, more job creation going forward. At the same time we are also looking very carefully at inflation. The other part of our mandate. As I’ve noted, inflation, headline inflation is at least temporarily higher being driven by gasoline prices and some other commodity prices.
Our expectation is that inflation will come down towards a more normal level, but we will be watching that carefully and also watching inflation expectations, which, you know, which are important that they remain well anchored if we are going to see inflation remain under good control. To answer your question, I don’t know exactly how long it will be before a tightening process begins. It will depend on the outlook an those criteria which I suggested. The extended period language is conditioned on exactly those same points. Extended period is conditioned on resource slack, on subdued inflation and on stable inflation expectations.
Whence once those conditions are violated or we move away from those conditions, that’s the time we need to begin to tighten. Extended period suggests it would be a couple of meetings probably before action, but unfortunately, the reason we use this vaguer terminology is that we don’t know with certainty how quickly response will be required and, therefore, we will do our best to communicate changes in our view as — but that will depend entirely on how the economy evolves.
MALE REPORTER: Mr. Chairman, first thanks for doing this. This is a tremendous development. There are critics who say that fed policy has driven down the value of the dollar and lower value to the dollar reduces American standard of living. How do you respond to the criticism that essentially fed policy reduced the American standard of living?
CHAIRMAN BERNANKE: Thanks, Steve. I’ll start by saying the secretary of the treasury is the spokesperson for the dollar and secretary Geitner had some words yesterday. Let me add to what he said first by saying that the Federal Reserve believes that a strong and stable dollar is both in American interest and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. Over the medium term where our policy is aimed, we are doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability.
By maintaining the purchasing value of the dollar, keeping inflation low. That’s obviously good for the dollar. The second thing we are trying to accomplish is get a stronger recovery understand achieve maximum employment. Again, a strong economy growing with attracting foreign p ka tall will be good for the dollar. In our view, if we do what is needed to pursue our dual mandate of price stability and maximum employment that will also generate fundamentals that will help the dollar in the medium term.
MALE REPORTER: Sorry, Mr. Chairman — it’s been unsuccessful so far.
CHAIRMAN BERNANKE: Well, the dollar fluctuates. One factor, for example, that has caused fluctuations have been quite extreme during the crisis has been the safe haven effect. For example, during the height of the crisis in the fall of 2008, money flowed in to the treasury market and drove up the value of the dollar substantially, reflecting the fact that U.S. capital markets are the deepest and most liquid in the world. A lot of what you have seen over the last couple of years has been the unwinding of that as the economy strengthened and uncertainty has been reduced. That’s indicative, I think, of the high standing that the dollar still retains in the world. Again ultimately the best thing we can do to create strong fundamentals for the dollar in the medium term is to first keep inflation low which maintains the buying power of the dollar and second, create a strong economy.
MALE REPORTER: John Hilsendraft from the Wall Street Journal. Many Americans are upset that gasoline prices are rising so fast and food prices are also going up. Can you talk about whether there’s anything that the fed can or should do about that? Can you also elaborate on the increase that we have seen in the inflation forecasts that the fed put out today?
CHAIRMAN BERNANKE: Sure. Thanks, John. So first of all, gasoline prices obviously have risen quite significantly. And we of course are watching that carefully. Higher gas prices are absolutely creating a great deal of financial hardship for a lot of people. And gas, of course, is a necessity. People need to drive to get to work. So it’s obviously a bad development to see gas prices rise so much.
Higher gas prices, higher oil prices also make economic developments less favorable. On the one hand obviously the higher gas prices add to inflation. On the other hand, by draining purchasing power from households, higher gas prices are also bad for the recovery. They cause growth to decline as well. It’s a double wham my coming from higher gasoline prices. Our interpretation of the increase in gas prices is the economist basic mantra of supply and demand. On the one hand we have a rapidly growing global economy, emerging market economies are growing very quickly. Their demand for commodities including oil is very, very strong. Indeed, essentially all of the increase in the demand for oil in the last couple of years, in the last decade has come from emerging market economies. In the United States our demand for oil, our imports have been actually going down over time.
The demand is coming from a growing economy where we have seen about a 25 percent increase in emerging market output since before the crisis. On the supply side, as everybody knows who watches television, we have seen disruptions in the Middle East and north Africa, Libya and other places that have constrained supply. That supply is not made up and that has in turn driven up gas prices significantly. This is an adverse development. It accounts in the short-term for the increase, m all of the increase in our inflation forecast at least in the very near term.
There’s not much that the Federal Reserve can do about gas prices per se. At least not without derailing growth entirely, which is certainly not the right way to go. After all, the fed can’t create more oil. We don’t control the growth rates of emerging market economies. What we can do is basically try to keep higher gas prices from passing into other prices and wages throughout the economy and creating a broader inflation which will be much more difficult to extinguish.
Again, our view is that most likely, of course we didn’t know for sure but we will be watching carefully, is that gas prices will not continue to rise at the recent pace. As they stabilize or even come down if the situation stabilizes in the Middle East, that will provide relief on the inflation front, but we have to watch it very carefully.
MALE REPORTER: Thank you. Scot Landman from Bloomberg news. Mr. Chairman, you stated several times this year that the recovery won’t be fully established until we see a sustained period of stronger job creation. First, has it become truly established yet? If not, what is your definition of a sustained period and what is your definition of stronger job creation?
CHAIRMAN BERNANKE: Well, as I mentioned, we have made a lot of progress. Last August when we began to talk about another round of securities purchases, growth was very moderate and we were actually quite concerned that growth was not sufficient to continue to bring the unemployment rate down. Since then, we have seen a reasonable amount of payroll creation, job creation. That picked up in the most recent few months, together with a decline in the unemployment rate from, you know, 10 percent down to the current rate of 8.8 percent. Labor market is improving gradually, as we say in our statement and we just like to make sure that that is sustainable and the longer it goes on, the more confident we are. Again, it is encouraging to see the improvement we have seen in recent months.
That being said, the pace of improvement is still quite slow and we are digging ourselves out of a very, very deep hole. We are still something like 7 million plus jobs below where we were before the crisis. So clearly, the fact that we are moving in the right direction even though that’s encouraging doesn’t mean that the labor market is in good shape. Obviously it’s not, we are going to have to continue to watch and hope that we will get stronger, increasingly strong job creation going forward.
MALE REPORTER: Robin Harding from the financial times. Mr. Chairman, you say in your statement that longer term inflation expectations have remained stable, but a number of measures of expectations have risen in recent months. It’s clear from the forecast that you expect inflyings to run above core for the near period. Is there anything that the Federal Reserve can do to prevent the public from incorrectly assuming that a period of higher inflation is on its way as a result? Thank you.
CHAIRMAN BERNANKE: Well, again, the inflation expectations that we are concerned about are medium term inflation expectations. So we have seen, for example, in the financial markets in the indexed bond market, for example, or in surveys like the Michigan survey we have seen near term inflation expectations rise fairly significantly, which is reasonable given higher commodity prices, higher gas prices. But for the most part although there has been some movement here and there, for the most part I think it’s fair to say that medium term expectations have not moved very much and they still indicate confidence that the fed will ensure that inflation in the medium term will be close to what I called the mandated consistent level.
What can we do? In the short run we can communicate and make sure that the public understands what our policy is attempting to do. To be clear what our objectives are and what steps we are willing to take to meet those objectives. Ultimately if inflation persists or if inflation expectations begin to move, there’s no substitute for action. We would have to spoon. I think while it is very, very important for us to try to help the economy create jobs and to support the recovery, I think every Central Banker understands that keeping inflation low and stable is absolutely essential to a successful economy. We will do what’s necessary to ensure that that happens.
FEMALE REPORTER: Mr. Chairman, what will be the impact on the economic recovery, job creation and rates on mortgages and other loans when the fed ends its 600 billion-dollar bond buying program? And quick follow-up is, how long will the fed continue to allow for reinvestments? Thank you.
CHAIRMAN BERNANKE: As I have noted and as you are all aware, we are going to complete the program at the end of the second quarter, $600 billion. We are going to do that pretty much without tapering. We are just going to let the purchases end.
Our view is based on past experience and based on analysis, the end of the program is unlikely to have significant effects on financial markets or on the economy. The reason being that first, just a simple point, that we hope that we have tell graphed today, we hope that we have communicated what we are planning to do and the markets have well anticipate the this step. And you would expect that policy steps which are well anticipated by the market would have relatively small effects because whatever effects you have have been capitalized in the financial markets.
Secondly we subscribe generally to what we call here the stock view of the effects of securities purchases by which I mean that what matters primarily for interest rates, stock prices and so on is not the pace of ongoing purchase, but rather the size of the portfolio that the Federal Reserve holes. So when we complete the program, as you noted, we are going to continue to reinvest maturing securities, both treasury and MBS. So the amount of securities that we hold will remain approximately constant. Therefore, we shouldn’t expect any major effect of that.
Put another way, the amount of ease monetary policy easing should essentially remain constant going forward from June.
At some point, presumably early in our exit process, we will, I suspect, based on on conversations we have been having around the FOMC table, it is very likely an early step would be to stop reinvesting all or part of the securities which are coming in, which are maturing, but take note that that step, although … does constitute a policy tightening. It would be lowering the size of our balance sheet and therefore would be expected to essentially tighten financial conditions. That being said, we therefore have to make that decision based on the outlook, based on our view of how sustainable the recovery is and what the condition, the situation is with respect to inflation. So we will base that decision on the evolving outlook.
MALE REPORTER: Is it in the fed’s power to reduce the rate of unemployment more quickly? How would you do that? Why are you not doing it?
CHAIRMAN BERNANKE: Well, I should say first of all that in terms of trying to help this economy stabilize and then recover, the Federal Reserve has undertaken extraordinary measures. Those include obviously all the steps we took to stabilize the financial system during the crisis. Again, many of which were extraordinary measures, taken under extreme circumstances.
Even beyond the steps we took to stabilize the system, we have created new ways to ease monetary policy. We have brought the federal funds rate target close to zero. We have used forward guidance in our language to effect expectations of policy changes. And, of course as everyone knows, we have now been two rounds of purchases of longer term securities which have seemed to have been effective in easing financial conditions and therefore providing support for recovery and for employment. Going forward we will have to continue to make judgments about whether additional steps are warranted, but as we do so we have to keep in mind that we do have a dual mandate; that we do have to worry about both the rate of growth but also the inflation rate.
As I was indicating earlier, I think that even purely from an employment perspective, if inflation were to become unmoored and inflation were to rise significantly, the employment loss in the future would be quite significant. So we do have to make sure that we are paying adequate attention to both sides of our mandate but clearly it is the case that we have done extraordinary things in order to try to help this economy recover.
MALE REPORTER: John Itsi with nrp news. It is the view of many economists that the second quantitative round of easings hasn’t done much for the competence. If there are positive effects, can you afford to end the program in June with the unemployment rate still around 9 percent?
CHAIRMAN BERNANKE: Thank you. First, I do believe that the second round of securities purchases was effective. We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions. We saw increases in stock prices. We saw reduced spreads in credit markets. We saw reduced volatility. We saw all the changes in financial markets and quite significant changes one would expect if one were doing a normal easing of policy regarding the federal funds rate.
Indeed we saw the same type of financial responses in the first round which began in March of 2009.
So we were able to get the financial easing that we were trying to get. We did get very significant easing from this program. You would expect based on decades of experience that easing financial conditions would lead to better economic conditions. And I think the evidence is consistent with that as well.
As I discussed in more detail in my Humphrey Hawkins testimony at the beginning of March, between late August when I first indicated that the Federal Reserve was seriously considering this additional step and early this year, not only the Federal Reserve but many outside forecasters upgraded their forecasts and we saw strengthening labor market conditions, higher rates of payroll, job creation, et cetera.
Now, the conclusion, therefore, that the second round of securities purchases was ineffective could only be validated when one thought that this step was a panacea, that it was going to solve all the problems and return us to full employment overnight.
We were very clear from the beginning while we thought this was an important step and that it was at an important time when we were all worried about a double dip an we were worried about deflation, we were very clear that this was not going to be a panacea. That it was only going to turn the economy in the right direction and indeed we published some analytics which gave job creation numbers which were significant, but not, certainly not enough to completely solve the enormous jobs problem that we have.
So again, relative to what we expected, anticipated, I think the program was successful. Why not do more? Again, this was similar to the question I received earlier. The trade-offs are getting less attractive at point. Inflation has gotten higher. Inflation expectations are a bit higher.
It is not clear that we can get substantial improvements in payrolls without some additional inflation risk. In my view if we are going to have success in creating a long-run sustainable recovery with lots of job growth, we have to keep inflation under control.
We have to look at both parts of the mandate as we choose policy.
MALE REPORTER: From Dow Jones. What is the right response if high oil prices persist? On the one hand they push inflation higher. On the other they hurt the economy by hurting spending. In the current environment, what is the best strategy?
CHAIRMAN BERNANKE: Well, we are going to continue to see what happens. Our anticipation is that oil prices will stabilize or tend to come down. If that happens, or if at least oil prices don’t increase significantly further, inflation will come down and we will have, we will be close to our medium term objectives.
So as we look at oil prices, as you point out, we have to look at both sides of the situation.
I do think that one of the key things that we will be looking at will be inflation expectations because if medium term inflation expectations remain well anchored and stable so that firms are not passing on at least on an ongoing sustained bases these higher costs into broader prices and into creating broader inflation in the economy, as long as inflation expectations are well stabilized, that won’t happen. Then we’ll feel more comfortable just watching and waiting and seeing how things evolve.
Again if we fear that inflation expectations look like they are becoming less anchored we would have to respond to that.
MALE REPORTER: You have talked a lot in the past about long-term unemployment. Can the Fed effectively reduce long-term unemployment?
CHAIRMAN BERNANKE: Well, first, you’re absolutely right; long-term unemployment in the current economy is the worst, really the worst it’s been in the post-war per. Currently something like 45 percent of all the unemployed have been unemployed for six months or longer. We know the consequences of that can be very distressing because people who are out of work for a long time, their skills tend to atrophy. They lose contacts with the labor market, with other people working, the networks that they built up. We saw in the European experience, for example, in the ’80s and ’90s that a period of high unemployment with very long term unemployment spells can lead unemployment to remain very high for a protracted period.
It is a very significant concern and it is one of the reasons that the Federal Reserve has been so aggressive. By getting unfloiment down, we hope to bring back to work some of the people who have been out of work as long as they have. And in that respect, try to avoid the longer term cons of people being out of work for months at a time. So that’s part of the reason that we have been as aggressive as we have.
As the situation drags on and as the long-term unemployed lose skills and lose contact with the labor market or perhaps just become discouraged and stop looking for work, then it becomes really out of the scope of monetary policy. At that point, job training, education and other types of interventions would probably be more effective than monetary policy.
SAME MALE REPORTER: Long-term, you think that’s out of the scope of what the fed can do?
CHAIRMAN BERNANKE: Indirectly, of course, to the extent that we can help the economy recover and help job creation proceed, then some of the people who get jobs will be those who have been out of work for a long time. That being said, we don’t have any tools for targeting long-term unemployment specifically. We can try to make the labor market work better broadly speaking.
MALE REPORTER: Fox business network, Mr. Chairman. Last week standard and purse put the United States debt on a negative watch for the very first time ever. What is your reaction to that? And are you concerned? Are you worried that the United States is going to lose its AAA credit rating?
CHAIRMAN BERNANKE: Well, in one sense sp’s action didn’t — S & P’s action didn’t really tell us anything. Anybody who read a newspaper knows that the United States has a very serious long-term fiscal problem. That being said I’m hopeful that this event will provide at least one more incentive for Congress and the administration to address this problem. I think it’s the most important economic problem at least in the longer term that the United States faces. We currently have a fiscal deficit which is simply not sustainable over the longer term. And if it is not addressed it will have significant consequences for financial stability, for economic growth, and for our standard of living.
It is encouraging that we are seeing efforts on both sides of the aisle to think about this issue from a long run perspective. It is not a problem that can be solved by making cease only for the next six months. It’s really a long-run issue. We are still a long way from a solution, obviously. But I think it is of the highest importance that our political leaders address this very difficult problem as quickly and as effectively as they can. To the extent that the S & P action goads a response, I think that’s constructive.
MALE REPORTER: Mr. Chairman, John Berry. In the past there have been times when fiscal policy has tightened and the Federal Reserve has chosen to ease its policy in response, partly to that given whatever the circumstances in the economy were at the time. Congress appears intent at this point in cutting spending significantly. Might restrain the economy as it appears to be doing in Britain where they are following a similar path.
Is there anything that the fed can do or should do if indeed there are large budget cuts sometime in the next 18 months?
CHAIRMAN BERNANKE: First let me say that addressing the fiscal deficit, particularly the long run unsustainable deficit is a top priority. Nothing I say should be construed as saying it’s anything other than a top priority. It is terribly important that our leaders address this issue.
I would also say that the cuts that have been made so far don’t seem to us to have had significant consequences for short-term economic activity. Now, my preference in terms of addressing the long-term deficit is to take a long-term perspective. It’s a long-term problem. If Congress and the administration are able to make credible commitments to cutting programs or in any way changing the fiscal profile going forward over a long period of time, that is the most constructive way to address what is in fact a long run problem.
If the changes are focused entirely on the short run, then they might have some consequences for growth. In that case, the feared reserve, which is as always going to try to set monetary policy to meet our mandate would take those into account appropriately. So far I have not seen any fiscal changes that have really changed our near term outlook.
MALE REPORTER: Thank you, Mr. Chairman. I am with the — Japanese newspaper. I would like to ask about uncertainties in the global economy or down effects. In match notes from the meeting, the committee noted — what is the latest assessment on the risks and uncertainties such as the tragedy in Japan and crisis in Europe and the problems in the Middle East and what are the effects on the US economy and on the world economy?
CHAIRMAN BERNANKE: One of the things that our projections include, we have only producing the forecast today with our minutes in three weeks we will include the full detailed projects as we normally do.
One of the things that we include is the views of the participants on the amount of uncertainty there is in the forecast going forward. And I think I can say without too much fear of giving away the secret that FOMC participants do see quite a bit of uncertainty in the world going forward. And a lot of that uncertainty is coming from global factors.
I have already talked about Middle Eastern, Africa, emerging -markets- which affected commodity prices and other things, European situation continues. We are watching that very carefully.
Obviously, you asked about Japan. Let me first say, you know, that I have had a lot of contact with my Japanese counterparts, Central Bank governor Shirakawa and other people in the Japanese government. We collaborated with them on the foreign exchange intervention, as you know.
And we are very admiring of the courage of the Japanese people in responding to these situations. And of the Central Bank of Japan has done a good job in providing liquidity and helping to stabilize financial markets in what are very, very significant disturbances to the economy.
The implications for Japan have been discussed at some length. I think Governor Shirakawa talked about them. In the near term there will be a decline in the Japanese output in the destruction, re-flecking electricity problems, et cetera.
We believe that will be relatively temporary and the economy will start to come back, but, of course, this is a major blow and it will take a lot of effort on the part of the Japanese people to restore the economy and to recover from the damage that was done by the tragedy.
For the United States, we are looking at this very carefully. Thus far, the main impact of the Japanese situation on the U.S. economy has been through supply chains. We have noted some automobile companies, for example, that have had difficulty getting certain components which are manufactured mostly or entirely in Japan.
And that has led a number of companies to announce that they would restrain production for a time. So there may be some moderate effect on the U.S. economy, but we expect it to be moderate and to be temporary. Again, the most important issue here is the recovery of Japan and our good wishes go out to the Japanese people and their efforts to overcome the adversity that they are facing.
MALE REPORTER: Mr. Chairman, you have often stressed, as indeed you did again today, the importance of keeping inflation expectations low and stable, to keep inflation itself under control.
But irrespective of inflationary expectations or psychology, isn’t it possible that the fed’s policies could be providing the monetary tender for inflation, the longer they continue?
CHAIRMAN BERNANKE: Well, we view our monetary policies as being not that different from ordinary monetary policy. It’s true that we used some different tools, but those tools are operating through financial conditions and we have a lot of experience understanding how financial conditions changes in interest rates changes in stock rates, so on, how they affect the economy, growth, et cetera. We are monitoring the state of the economy, watching the evolving outlook and our intention as is always the case is to tighten policy at the appropriate time to ensure that inflation remains well controlled; that we meet that part of our mandate while doing the best we can to ensure also that we have a stable economy and a sustainable recovery in the labor market.
So the problem is the same one that Central Banks always face, which is choosing the appropriate path of tightening at the appropriate stage of the recovery. It’s difficult to get it exactly right, but we have a lot of experience in terms of what are the considerations and the economics that underlie those decisions.
So we anticipate that we will tighten it at the right time and that we will there by allow the recovery to continue and allow the economy to return to a more normal configuration. At the same time keeping inflation low and stable.
MALE REPORTER: Many of the commercial partners of the United States are very concerned about the evolution of your foreign exchange rate.
If in one hypothetical case the dollar would sink to a not tolerable level which would harm very much the U.S. economy and the prospect for the global economy because it affects the confidence of so many people, would you consider changing your monetary policy in accordance to that threat?
CHAIRMAN BERNANKE: Well, as I said earlier, we do believe that a strong and stable dollar is in the interests of the United States and is in the interest of the global economy. Our view is that the best thing we can do for the dollar is first to keep the purchasing power of the dollar strong by keeping inflation low and by creating a stronger economy through policies which support the recovery and cause more capital inflows to the United States. Those rt kinds of policies that in the mean term will create the conditions for an appropriate and healthy level of the dollar. So I don’t think I really want to address a hypothetical which I really don’t anticipate. I think the policies that we are taking not with standing short-term fluctuations will lead to a strong and stable dollar in the medium term.
MALE REPORTER: Anthony mason, CBS. This is that rare news conference that actually makes news before it happens.
Can you talk a little bit about your decision to take this historic step of holding a news conference after a fed meeting, what anxieties you may have had to do it and how facing the media compares to facing Congress.
CHAIRMAN BERNANKE: Thanks, Tom. Well, the Federal Reserve has been looking for ways to increase transparency now for many years. We have made a lot of progress. It used to be that the mystique of Central Banking was all about not letting anybody know what you were doing.
As recently as 1994, the Federal Reserve didn’t even tell the public when it changed the target for the federal funds rate. Since then we have taken a number of steps, a statement which includes a vote. We produce very detailed minutes which are released only three weeks after the meeting which is essentially a production lag. We now provide quarterly projections including long run objectives as well as near term outlook. We have substantial means of communicating through speeches, testimony and the like.
We have become, I think, a very transparent Central Bank.
That being sated, we had a subcommittee headed by the Vice-Chair of the board, Janet Yellen, looking for yet additional steps to provide additional transparency and ctdibility and the — and accountability. The press conference came right to the top. This is an area, first of all, where global Central Bank practice includes now many Central Banks do use press conferences and we have some perns with them.
And secondly it provides a chance for the chairman in this case to provide additional color and context for both in this case both the meeting and the projections that are being made by the committee we thought it was a natural next step. We are not do done. We are looking for more things we can do to be more transparent.
I have always been a believer in providing as much information as you can to help the public understand what you are doing, to help the markets understand what you are doing, and to be accountable to the public for what you are doing. Now, of course, the fed didn’t do this for a long time. I think the counter argument has always been that that if there was a risk that the chairman speaking might create unnecessary volatility in financial markets or may not be necessary given all the other sources of information that come out of the Federal Reserve.
It was our judgment after thinking about this for some time that at this point the additional benefits from more information, more transparency, meeting the press directly outweighed some of these risks.
I think over time we will experiment to try to make sure that this is an effective venue as possible.
MALE REPORTER: Mr. Chairman, Ken Rogoff, wrote a book looking at 800 years of financial history and discovered when you have a financial crisis it takes a lot longer for the economy to recover.
Are people expecting too much from the Federal Reserve in terms of helping the economy recover? Has that complicated your monetary policy making?
CHAIRMAN BERNANKE: Let me say first that Ken Rogoff was a graduate school class mate of mine. I even played Chess against him, which was a big mistake. I enjoyed that book very much. I thought it was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.
What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a great deal on the problems in credit markets on recoveries.
Other aspects would include the effects of credit problems on areas like housing and so on. We are seeing all that, of course, in our economy.
That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.
And so we haven’t allowed that historical fact to dissuade us from doing all we can to support a strong recovery. That being said it is a relatively slow recovery. A factor is that this is triggerd by a bubble in the housing market and the housing market remains very weak.
And under normal circumstances construction, both residential and nonresidential would be a big part of the recovery process. There are a number of other factors, oil prices and other things, there are a number of factors holding the recovery back. So there are good reasons for why the recovery is slower than we would like. At the same time it is very hard to blame the American public for being impatient.
Conditions are far from where they, where we would like them to be. The combination of high unemployment, high gas prices and high foreclosure rates is a terrible combination. People are having a tough time. I can certainly understand why people are impatient.
All I can say is while the recovery process looks likely to continue to be relatively moderate one compared to the depth of the recession, I do think that the pace will pick up over time and I am very confident that in the long run the U.S. will return to being the most productive, one of the fastest growing and dynamic economies in the world.
And it hasn’t lost any of the basic characteristics that made it the preeminent economy in the world before the crisis and I think we will return to that status as we recover.
Thank you very much. And thank you for coming.
(As observed by Cherise Kelley in real time in closed captioning on the Federal Reserve’s UStream channel. The broadcast commenced at 2:15 pm eastern time and ended at 3:13 pm Eastern time on April 27, 2011. Some of the words in the closed captioning differed from what was heard. In these cases, corrections have been made. Other than that, this text is an unaltered transcript.)
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