FOMC Press Conference - 2013-12-18
Central bank: fed | Type: press_conference | Date: 2013-12-18

December 18, 2013 Chairman Bernanke’s Press Conference FINAL
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Transcript of Chairman Bernanke’s Press Conference
December 18, 2013
CHAIRMAN BERNANKE. Good afternoon. The Federal Open Market Committee
(FOMC) concluded a two-day meeting earlier today. As you already know from our statement,
the Committee decided, starting next month, to modestly reduce the pace at which it is increasing
the size of the Federal Reserve’s balance sheet. The Committee also clarified its guidance on
interest rates, emphasizing that the current near-zero range for the federal funds rate target likely
will remain appropriate well past the time that the unemployment rate declines below
6½ percent, especially if projected inflation continues to run below the Committee’s 2 percent
longer-run goal.
Today’s policy actions reflect the Committee’s assessment that the economy is
continuing to make progress, but that it also has much farther to travel before conditions can be
judged normal. Notably, despite significant fiscal headwinds, the economy has been expanding
at a moderate pace, and we expect that growth will pick up somewhat in coming quarters, helped
by highly accommodative monetary policy and waning fiscal drag. The job market has
continued to improve, with the unemployment rate having declined further. At the same time,
the recovery clearly remains far from complete, with unemployment still elevated and with both
underemployment and long-term unemployment still major concerns. We have also seen
ongoing declines in labor force participation, which likely reflect not only longer-term
influences, such as the aging of the population, but also discouragement on the part of potential
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
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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 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.
Let me now return to our decision to reduce the pace of asset purchases. When we began
the asset purchase program in September 2012, we said that we would continue purchases until
the outlook for the labor market had improved substantially in a context of price stability. Since
then, we have seen meaningful cumulative progress in the labor market. For example, since we
began the current purchase program, the economy has added about 2.9 million jobs and the
unemployment rate has fallen by more than a percentage point, to 7 percent. For comparison,
when we started the program, many forecasters saw the unemployment rate remaining near
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8 percent throughout 2014. Recent economic indicators have increased our confidence that the
job market gains will continue. For example, nonfarm payrolls have recently been increasing at
a pace of about 200,000 jobs per month, and the unemployment rate has fallen by 0.6 percentage
point since June. With fiscal restraint likely diminishing and with signs that household spending
is picking up, we expect economic growth to be strong enough to support further job gains.
Further, FOMC participants now see the risks around their forecasts of growth and
unemployment as having become more nearly balanced, rather than tilted in an unfavorable
direction as they were at the inception of the asset purchase program.
As you know, we have been purchasing $85 billion per month in longer-term Treasury
and agency mortgage-backed securities. Starting in January, we will be purchasing $75 billion
of securities a month, reducing purchases of Treasuries and mortgage-backed securities by
$5 billion each. It is important to note though that, even after this reduction, we will be still
expanding our holdings of longer-term securities at a rapid pace. We will also continue to roll
over maturing Treasury securities and reinvest principal payments from the Federal Reserve’s
holdings of agency debt and agency mortgage-backed securities into agency mortgage-backed
securities. Our sizable and still-increasing holdings will continue to put downward pressure on
longer-term interest rates, support mortgage markets, and make financial conditions more
accommodative, which in turn should promote further progress in the labor market and help
move inflation back toward the Committee’s objective of 2 percent.
Our modest reduction in the pace of asset purchases reflects the Committee’s belief that
progress toward its economic objectives will be sustained. If the incoming data broadly support
the Committee’s outlook for employment and inflation, we will likely reduce the pace of
securities purchases in further measured steps at future meetings. Of course, continued progress
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is by no means certain. Consequently, future adjustments to the pace of asset purchases will be
deliberate and dependent on incoming information. Asset purchases remain a useful tool that we
are prepared to deploy as needed to meet our objectives.
With unemployment still well above its longer-run normal rate, which Committee
participants currently estimate to be between 5.2 and 5.8 percent, and with inflation continuing to
run below the Committee’s 2 percent longer-term objective, highly accommodative monetary
policy remains appropriate. To emphasize its commitment to provide a high level of monetary
accommodation for as long as needed, the FOMC today also enhanced its forward guidance. For
the past year, the Committee has said that the current low target range for the federal funds rate
would be appropriate at least as long as the unemployment rate remained above 6½ percent,
inflation was projected to be no more than half a percentage point above our 2 percent longer-run
goal, and longer-term inflation expectations remained well anchored. We have emphasized that
these numbers are thresholds, not triggers, meaning that crossing a threshold would not lead
automatically to an increase in the federal funds rate but would indicate only that it was
appropriate for the Committee to consider whether the broader economic outlook justified such
an increase. With many FOMC participants now projecting that the 6½ percent unemployment
threshold will be reached by the end of 2014, the Committee decided to provide additional
information about how it expects its policies to evolve after the threshold is crossed.
Based on its assessment of current conditions and the outlook, which is informed by a
range of indicators, including measures of labor market conditions, financial conditions, and
inflation pressures, the Committee now anticipates it will likely be appropriate to maintain the
current federal funds rate target well past the time that the unemployment rate declines to below
6½ percent, especially if projected inflation continues to run below its 2 percent goal. In part,
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this expectation reflects our assessment, based on a comprehensive set of indicators, that there
will still be a substantial amount of slack in the labor market when the unemployment rate falls
to 6½ percent. This continuing job market slack imposes heavy costs on the unemployed and the
underemployed and their families and reduces our nation’s productive capacity, warranting our
ongoing highly accommodative policy. But, as the last phrase of the enhanced guidance
underscores, the prospects for inflation provide another reason to keep policy accommodative.
The Committee is determined to avoid inflation that is too low as well as inflation that is too
high, and it anticipates keeping rates low at least until it sees inflation clearly moving back
toward its 2 percent objective.
Our forward guidance is reflected in Committee participants’ latest projections for the
path of the federal funds rate. Although the central tendency of the projected unemployment rate
for the fourth quarter of next year encompasses 6½ percent, 15 of 17 FOMC participants do not
expect a rate increase before 2015. Most see our target for the federal funds rate as rising only
modestly in 2015, while 3 do not see an increase until 2016. For all participants, the median
projection for the federal funds rate is 75 basis points at the end of 2015 and 1.75 percent at the
end of 2016.
In summary, reflecting cumulative progress and an improved outlook for the job market,
the Committee decided today to modestly reduce the monthly pace at which it is adding to the
longer-term securities on its balance sheet. If incoming information supports the Committee’s
expectation of further progress toward its objectives, the Committee is likely to reduce the pace
of monthly purchases in further measured steps in future meetings. However, the process will be
deliberate and data-dependent; asset purchases are not on a preset course. The FOMC also
provided additional guidance on future short-term interest rates, stating that it expects to
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maintain the federal funds target in its current near-zero range well past the time that the
unemployment rate falls below 6½ percent, especially if projected inflation continues to run
below 2 percent. The Federal Reserve’s enhanced guidance about its policy intentions and its
substantial and still-increasing holdings of longer-term securities will ensure that monetary
policy remains highly accommodative, consistent with the pursuit of its mandated objectives of
maximum employment and price stability.
Thank you. I’ll be glad to take your questions.
YLAN MUI. Thank you. Ylan Mui with the Washington Post. Today was the first
reduction in asset purchases, and you just said that future reductions will likely occur in
measured steps, but are not on a predetermined course. Can you tell us any more about the
framework that you all plan to use to determine the size and the timing of those reductions? And
previously you had said that you expect the program to end altogether by the middle of next year.
Is that still a likely scenario?
CHAIRMAN BERNANKE. Well, as I said, the steps that we take will be data-
dependent. If we’re making progress in terms of inflation and continued job gains— and I
imagine we’ll continue to do, probably at each meeting, a measured reduction—t hat would take
us to late in the year, certainly not by the middle of the year. If the economy slows for some
reason or we are disappointed in the outcomes, we could skip a meeting or two. On the other
side, if things really pick up, then of course we could go a bit faster, but my expectation is for
similar moderate steps going forward throughout most of 2014.
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
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should anticipate? Finally, when you say “well past” the unemployment rate of 6½ percent, why
not pick a number? Why say “well past”? Thank you.
CHAIRMAN BERNANKE. Sure. On the first issue of $10 billion, again, we say we are
going to 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.1
In terms of MBS versus Treasuries, we discussed that issue. I think that the general sense
of the Committee was that equal reductions, or 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 of another number, the unemployment rate—let ’s talk first about the labor
market condition. The unemployment rate is a good indicator of the 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 6½—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 will be some time past the 6½ percent
before all of the other variables that we’ll be 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
1 The Chairman meant to say: “We could stop the reductions in the pace of purchases if the economy
disappoints. We could reduce the pace of purchases somewhat more quickly if the economy is stronger.”
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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 at the end of next year, end of 2014.
And then the first rate increases, according to the so-called dots 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 emphasize that it will depend on our being persuaded that—over , across a broad range of
indicators—the labor market is sufficiently strong that we could begin to withdraw
accommodation.
JON HILSENRATH. Jon Hilsenrath from the Wall Street Journal. Mr. Chairman, as
you well know, the Fed is going through a transition next month. Can you talk about the role
that Janet Yellen played in formulating the policy that’s being laid out today, and what kind of
consistency the public can expect as we go into her tenure, assuming she’s confirmed, with the
program that you’re laying out today? Will it carry on under her leadership?
CHAIRMAN BERNANKE. Yes, it will. I have always consulted closely with Janet,
even well before she was named by the President, and I consulted closely with her on these
decisions as well. And she fully supports what we did today.
ROBIN HARDING. Robin Harding from the Financial Times. Mr. Chairman, your
inflation forecasts never get back to 2 percent in the time horizon that you cover here, out to
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 control policy, as
you’ve said in the past— given that that would imply inflation going a bit above target at some
point? Thank you.
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CHAIRMAN BERNANKE. Well, again, these are individual estimates, there are 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 2½ 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, whether measured by financial markets or surveys; if
you look at growth, which we now anticipate will be picking up both in the U.S. and
internationally; if you look at wages, which have been growing at 2 percent and a little bit higher
according to many indicators—a ll of these things suggest that inflation will gradually pick up.
But what I tried to emphasize in my opening remarks, and 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 d 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 on optimal control?
CHAIRMAN BERNANKE. Well, even under optimal control, it would take a while for
inflation—i nflation is quite—can be quite inertial . It can take quite a time to move. And the
responsiveness of inflation to increasing economic activity is quite low. So—and particularly
given an 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 quickly to target. But we are,
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again, committed to doing what’s necessary to get inflation back to target over the next couple of
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 has fallen 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 have happened, 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’ve 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 as
being about 1½ percentage points of growth. We’re looking like we’re going to get in the low 2s
actual growth. Add those numbers together, it’s kind of a counterfactual. It says that monetary
policy appears to have succeeded in offsetting a good bit 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
accommodation. We’re still going to be buying assets at a high rate and increasing and
holding—increasing our balance sheet and holding on to those assets . In our guidance today—
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we strengthened our guidance to make clear that we expect to keep rates low well beyond the
point that unemployment hits 6½ percent.
PETER BARNES. Peter Barnes, Fox Business, sir. Was it a close call in the discussion
today among participants and members of— given all you’ve said about the outlook and your
forecast, was there a lot a of debate on whether or not to go ahead and start tapering now or wait
longer— wait for more data?
CHAIRMAN BERNANKE. Well, certainly, it’s a very—it was a very important
decision, and we debated it quite extensively. That being said, the question we asked ourselves
was, did we feel comfortable that—to say that we had met , or were at least well on the way
towards meeting, the criterion we set when we began the program in September of 2012? And
that criterion, of course, was a substantial improvement in the outlook for the labor market. And
if you look at the cumulative improvement—and I mentioned some figures in my opening
remarks—or if you look at recent numbers , either on employment, unemployment. And also in
terms of growth, we’re seeing encouraging numbers in terms of household spending, for
example, auto purchases, fiscal drag is reduced, stronger numbers internationally. Now, I don’t
want to overstate the case. As you look at our projections, you’ll see we only assume or project
a small pickup in growth going into next year. But there was a pretty widespread view that there
was a reasonable expectation, first, that the recent gains in the labor market would continue—
and, remember, we’re just beginning this process now, so by the time we complete this process, I
think it’s very likely that we’ll easily pass the hurdle of a substantial improvement in the outlook
for the labor market. Now, it is true that while we have passed the—or , made significant
progress on the labor market and growth hurdles, there is still this question about inflation, which
is a bit of a concern—more than a bit of concern, as we indicated in our statement . Our outlook
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is still for inflation to go back to 2 percent. I gave you some reasons why I think that will
happen. But we take that very seriously, and if inflation does not show signs of returning to
target, we will take appropriate action.
REBECCA JARVIS. Hi, there. Rebecca Jarvis, ABC News. Mr. Chairman, now that
you have introduced tapering into the system, if the economy were to stumble again in the future,
would you recommend, or have you discussed with your colleagues, increasing bond buying in
the future? And have you considered any alternative measures— for example, more direct
stimulus directly into the economy if it were to stumble again?
CHAIRMAN BERNANKE. What kind of direct stimulus do you have in mind?
REBECCA JARVIS. Well, any type of stimulus that you would not be essentially
buying it back from the banks.
CHAIRMAN BERNANKE. Well, in terms of the legal authorities that the Federal
Reserve has, we don’t have some of the—
REBECCA JARVIS. If you could ask for it.
CHAIRMAN BERNANKE. If we could ask for it. Well, we’re getting now to a fanciful
discussion, I think. I think our basic tools are asset purchases, and we are allowed only to buy
Treasuries and agency securities. We are not allowed to buy corporates or other things, the way
many central banks are. We have—with interest rates near zero, we can manage our forward
guidance, and I think that has been helpful, that’s been effective. We probably could do more
with that. But there are limits to that as well because, beyond a certain point, markets may not
accept— you know, may not view the long-distance, way-ahead guidance as being credible. We
can change the interest rate we pay on reserves, which is something we’ve talked about.
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The other kind of thing that—the only other thing I can think of that amounts to a dir ect
infusion into the economy, if you will, is action similar to the British Funding for Lending
program, where they provided cheap funding to banks if the banks could show that they had
increased their lending to households or small businesses. We could, in principle, do something
like that, and we’ve looked at that because we do have a discount window where we lend to
banks. However, somewhat differently from what was going on in the U.K. and in Europe, here,
our banks are flush with liquidity, they have plenty of cash on hand—they ow n lots of reserves,
of course. And so our sense was that there just wouldn’t be any take up on that program, at least
under current conditions. We do not have the authority to lend directly to small businesses or
other types of institutions. And in any case, I don’t think right now that tight credit, in most
areas, is the major problem. I think what we have, in many cases, is that firms are either not
looking for credit or their balance sheets are not strong enough that they pass creditworthy
screenings at the bank. So we do have a range of things that we can do, but we are already
being, I think, pretty aggressive.
REBECCA JARVIS. And would you increase the bond purchases?
CHAIRMAN BERNANKE. Under some circumstances, yes.
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?
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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 the 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 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—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 D epression, where monetary policy was, on
the whole, pretty passive—th is 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 the U.K. 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.
JASON LANGE. Jason Lange with Reuters. Chairman Bernanke, today, with one hand,
you’re giving the economy something by telling us that or signaling that you may keep interest
rates lower for longer than we previously thought. But with the other hand, you’re taking
something away by reducing the large-scale asset purchases. If you think that, overall, this is
maintaining the level of monetary accommodation steady, is that a sign that the decision to
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reduce the asset purchases is relatively less about an improved outlook for the economy and
perhaps more about the concern that the asset purchases are less effective or might be fueling
bubbles? Thank you.
CHAIRMAN BERNANKE. Well, as I said before, asset purchases are a supplementary
tool. Our main tool is interest rate policy. The reason that asset purchases are a supplementary
tool is because it’s a much less familiar tool. We have less ability to calibrate how big the effects
are, for example. And it’s also true that, as the balance sheet of the Federal Reserve gets large,
managing that balance sheet, exiting from that balance sheet become more difficult. And there
are concerns about effects on asset prices, although, I would have to say that’s another thing that
future monetary economists will want to be looking at very carefully. So, our view was—in
September 2012—was that we had interest rates already low, and they were expected to stay low
for a good long time. The economy, though, was faltering. We needed an additional boost. And
so we brought in the asset purchase program again. We put in a specific objective, which is
substantial improvement in the outlook for the labor market. Our sense was once that
intermediate objective was attained—that is, when the economy had grown and was moving
forward—that , at that point, we could begin to wind down the secondary tool, the supplementary
tool, and achieve essentially the same amount of accommodation using interest rates and forward
And so, I do want to reiterate that this is not intended to be a tightening. We don’t think
that there’s an inflation problem or anything like that. On the one hand, asset purchases are still
going to be continuing, we’re still going to be building our balance sheet. The total amount of
assets that we acquire are probably more than was—certainly more than what was expected in
September 2012 or in June 2013. So we’ll have a very substantial balance sheet, which we’ll
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continue to hold. And now we’ve also clarified our guidance that we will be keeping rates low
well past unemployment of 6.5 percent. So we’re trying here to get a high level of
accommodation. It is true that the purchases are—we view as supplementary to the interest rate
policy. But, again, the action today is intended to keep the level of accommodation more or less
the same overall and enough to push the economy forward.
VICTORIA MCGRANE. Victoria McGrane, Dow Jones. In an earlier response, you
sort of laid out the argument against—or sort of explain ed why the Committee didn’t lower the
6.5 percent unemployment threshold. Is that conversation over? Have you all put off the table
changing those thresholds? Has there been any other further discussion on perhaps adding a
lower bound to the inflation target as well? And then, specifically on inflation, what tools or
actions could the Committee take if inflation continues to run below your target or even falls
CHAIRMAN BERNANKE. Well, I think we want to make an assessment now. I
wouldn’t expect any changes in the very near term. We want to see how much accommodation
we have and whether it’s sufficient, whether the economy is continuing to grow, and inflation is
moving back toward target, as we anticipate. But there are things we can do. We can strengthen
the guidance in various ways. And while the view of the Committee was that the best way
forward today was in this more qualitative approach, which incorporates elements both of the
unemployment threshold and the inflation floor, that further strengthening would be possible,
and it’s something that has certainly not been ruled out. And, of course, asset purchases are still
there to be used. We do have tools to manage a large balance sheet. We’ve made a lot of
progress on that. So while, again, while we think that we can provide a high level of
accommodation with a somewhat slower pace—but still very high pace —of asset purchases and
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our interest rate policy, we do have other things we can do if we need to ramp up again. That
being said, we’re hopeful that the economy will continue to make progress, and that we’ll begin
to see the whites of the eyes of the end of the recovery and the beginning of the more normal
period of economic growth.
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—t here’s an argument for 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 that 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 the
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 for 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 ANDREWS. 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
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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. They include, for example, the observation that 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 a while. We’ve had continuing
financial disturbances in Europe and elsewhere. We’ve had 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—have
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 just be a slower pace of underlying
potential, at least temporarily. Productivity 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, the U.K., Japan—compared to other countries and
advanced 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 entrée 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.
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GREG ROBB. Thank you. Greg Robb from MarketWatch.com. You just talked a little
bit about fiscal policy and now Congress has—is set to pass a budget deal, and they haven’t
really done much to reduce the deficit. And it looks like they’re not going to do anything until
after the next presidential election. So, could you talk a little bit about that? You’ve been
pressing for a bigger deal and reducing the U.S. debt burden. Thanks.
CHAIRMAN BERNANKE. Well, as always, of course, I don’t address specific fiscal
actions. I will say a couple of things about this deal. One is that, relative to where we were in
September and October, it certainly is nice that there’s been a bipartisan deal, and that it looks
like it’s going to pass both houses of Congress. It’s also, at least directionally, what I have
recommended in testimony, which is that it eases a bit the fiscal restraint in the next couple of
years, a period where the economy needs help to finish the recovery. And, in place of that, it
achieves savings further out in the 10-year window. So those things are positive things. Of
course, there’s a lot more work to be done, I have no doubt about that. But it’s certainly a better
situation than we had in September and October, or in January during the fiscal cliff, for that
matter. And I think it will be good for confidence if fiscal policy and congressional leaders work
together to—even if there’ s—even if the outcomes are small , as this one was, it’s a good thing
that they are working cooperatively and making some progress.
DONNA BORAK. Chairman Bernanke, Donna Borak with American Banker. As you
look back on the regulatory reform effort over the last several years—the rules that have been
completed, those that have yet to be finalized—w hat rules would you have liked to have seen
tougher? And ones that, perhaps, you would have liked to have seen finished before you leave?
And as someone that has been a steward of the financial crisis and the reform effort, as you leave
now, do you feel that the safeguards are now in place, that the system is safer?
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CHAIRMAN BERNANKE. Yes, the system is certainly safer, and one indication of that
is the amount of capital that large banks hold. So, for example, on the capital side, we have
imposed Basel III requirements, much tougher requirements, as you know, for the large banks,
with surcharges that will be part of that process. We’ve imposed— I think one of the main
innovations, which I am very pleased with, is the use of stress testing, trying to see whether
banks have enough capital not only to deal with normal fluctuations, but to deal with the very
severe combination of a sharp downturn in the economy and very bad financial conditions. And
I think that has been a very important test, both of banks’ abilities to survive a bad situation but
also their abilities to measure their risks, which was something that was very deficient going into
the crisis. Beyond that, we’re looking at a leverage ratio, of course, that we expect to complete
fairly soon, the possibility of having debt required at the holding company to assist in a
resolution, we’re looking at capital for—to backstop firms that rely heavily on short -term
wholesale funding. So there’s a much stronger capital-oriented drive at this point to strengthen
our financial system—and th at’s just one dimension. And then there’s liquidity and many other
aspects. I think, you know, it’s not really up to me to say whether these things are tough enough
or not. I mean, you and other observers who are writing about this and thinking about this
obviously will have your opinions. But, I guess, what I would say about that is that we’re not
done. We have still some important rules to complete, although all of them are well advanced.
And as we get these rules done and implement them, I’m sure they’ll make a very substantial
difference in the safety of the system, but whether more needs to be done— I’ll leave that as an
open question, and I think we’ll be working on this for some time.
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
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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 decisionmaking 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 that 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 a private accounting firm that does all the books as well under very tough
standards. We publish regular reports on all aspects of our operations. So we’re very open, and
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we are by all means willing to work with Congress to see if there’s anything that 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 are 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 recover 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, 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
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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 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 and 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.
KEVIN HALL. Thank you, Mr. Chairman. Kevin Hall with McClatchy Newspapers. I
want to indulge in a local question and a broader question. As the paper that owns the South
Carolina papers, I think there’s a lot of interest as to whether you’re going to retire to Dillon,
South Carolina, and write your kiss-and-tell book. But do you envision any role for yourself in
South Carolina, post-chairmanship? And then the broader question— your predecessor, Dr.
Greenspan, in his new book argues that long-term investment—one of the reasons we may be
seeing such a slow economy is that people are afraid debt and deficits are reducing long-term
investment. People are—companies are investing in the sorts of things that make them leaner,
get by with fewer people, but the kind of expansion, we’re not seeing. Do you feel that debt and
deficits are weighing down these sorts of long-term decisionmaking, and does it argue for more
drastic action on the short-term?
CHAIRMAN BERNANKE. Let me ask you, do you own the Charlotte Observer?
KEVIN HALL. Yes.
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CHAIRMAN BERNANKE. Ah. So, most of my family now is in North Carolina, and
I’ve got a number of family members in Charlotte and also in Durham. So my wife and I are
going to spend the Christmas vacation in North Carolina. I still have—my uncle still lives in
Dillon. He’s 85, and very, very, very chipper.
UNIDENTIFIED SPEAKER. [Inaudible remark]
CHAIRMAN BERNANKE. Okay, good.
But I think for the immediate future, my wife and I, I believe, will stay in Washington for
a bit of time.
About investment, I think there are a lot of reasons why investment is weaker than we
would like. I think the first and most important reason is, the recovery is slow. I mean,
investment is driven by sales, by the need for capacity. And, you know, with a slow-growing
GDP, slow-growing economy, most firms do not yet feel that much pressure on their capacity to
do major, new projects. There’s also a variety of uncertainties out there—fis cal, regulatory, tax,
and so on—that no doubt affect some of these calculations. We hear that from our FOMC
participants around the table as they report from their local Districts. So I think there are a lot of
Usually, you think that the way that a deficit or a long-term debt would affect investment
would be through what’s called “crowding out”—that is, raising interest rates. But high interest
rates—we may have many problems , but high interest rates is not our problem right now.
There’s plenty of—particularly for larger firms —there’ s plenty of credit available at low interest
rates. And we intend, of course, to try to continue to provide that to help the economy grow and
to stimulate investment spending. But I think that it’s going to take faster overall growth to get
firms trying to expand capacity, and I think if we—if consumer spending increases , as we think it
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will, and if exports increase, as they seem to be doing, then we’ll probably see greater investment
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 y ou might say, cost and benefits—to what extent has t hat calculation already changed?
To what extent 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 I’ll 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
costs 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.
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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 the “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 when
I say “we,” I mean the economics profession—don’ t understand very well what moves the term
premium. And so, we saw 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—i f banks have a lot of capital, they can withstand losses, for example—a nd 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
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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 will 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 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 in asset purchases had boosted GDP by about 3 percent
and increased private-sector employment by 2 million jobs. Now your balance sheet is nearing
$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—i n terms of the study, it’s
very hard to know. It’s an imprecise science to 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 it 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 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 beg an our program—were on the order 7.8 percent , and that
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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 yields, brought down
car loan interest rates, and we’ve seen the response in those areas as the economy has done
better. Moreover, again, this has 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 our primary tool.
DON LEE. Don Lee, L.A. Times. Unemployment benefits, as you know, are expiring
shortly for more than a million people, and many more people will see their benefits end next
year. How much of an economic impact do you see that having? And, secondly, what effect
would you expect that will have on the unemployment rate? Could it—if those people drop out
of the labor force, then could that knock the employment rate down quite a bit?
CHAIRMAN BERNANKE. Yes. Well, obviously it has a big economic effect on those
directly affected, you know, who are receiving benefits, and we do have an unusually large
number of long-term unemployed people in the United States now, which is obviously a major
concern and one that I cited in my opening remarks. The effects of ending extended
unemployment benefits, quantitatively, for the economy overall, are probably not very large
because they work in two directions. On the one hand, by putting the benefits into the system,
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you are providing additional income. That income is spent. People receiving unemployment
benefits obviously tend to spend a very high fraction of their income. That is a positive for
growth. On the other side, it—probably some folks who are— can no longer qualify for
unemployment benefits will just drop out of the labor force, and that will bring the
unemployment rate down, but, for some sense, the wrong reason. So, overall, it will have—it
could have a very small effect on the measured unemployment rate. But, again, I think that issue
needs to be discussed more in terms of the impact on those most directly affected rather than on
the overall economy.
KATE DAVIDSON. Hi. Kate Davidson from Politico. This is a bit of a follow-up to an
earlier question. You talked about this centennial review of the Fed that the House is
undertaking. And the Fed, of course, has been under a lot of scrutiny, and you spoke recently
about the importance of the Fed standing up to political pressure. So I just wondered what
advice you have, or what advice you’ve already given, to Janet Yellen when it comes to dealing
with Congress.
CHAIRMAN BERNANKE. Excellent question. Well, I think the first thing to agree to
is that Congress is our boss. The Federal Reserve is an independent agency within the
government. It’s important that we maintain our policy independence in order to be able to make
decisions without short-term political interference. At the same time, it’s up to the Congress to
set our structure, to set our mandate, and that’s entirely legitimate, and we need to go and explain
ourselves. We need to explain why certain approaches are not so good or might be better. But,
obviously, they represent the public, and they certainly have every right to set the terms on which
the Federal Reserve operates and so on.
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That being said, I think that we are, in fact, an effective central bank, that we are near the
frontier in terms of transparency, in terms of the effectiveness of our policies. We’re highly
respected among central bankers and other policymakers around the world. And so, I hope that
when they do review the Fed, if that’s what they do, again, that they rely on expertise and highly
qualified individuals who know the ins and outs of central banking and monetary policy, which
are not simple matters. And it would be very interesting to have a thorough discussion of many
of the issues involved that the Fed has been engaged in. But, again, I hope it will be on a high
level that uses the best and most qualified people debating, you know, what changes, if any, are
needed and—or, you know, what ’s being done right.
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
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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 Ph.D. 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.