Ben S Bernanke: Semiannual Monetary Policy Report to the Congress
Testimony by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal
Reserve System, before the Committee on Financial Services, US House of
Representatives, 29 February 2012.
* * *
Chairman Bachus, Ranking Member Frank, and other members of the Committee, I am
Monetary Policy Report to the
pleased to present the Federal Reserve's semiannual Congress.
I will begin with a discussion of current economic conditions and the outlook and then turn to
monetary policy.
The economic outlook
The recovery of the U.S. economy continues, but the pace of expansion has been uneven
and modest by historical standards. After minimal gains in the first half of last year, real gross
domestic product (GDP) increased at a 2-1/4 percent annual rate in the second half.1 The
limited information available for 2012 is consistent with growth proceeding, in coming
quarters, at a pace close to or somewhat above the pace that was registered during the
second half of last year.
We have seen some positive developments in the labor market. Private payroll employment
has increased by 165,000 jobs per month on average since the middle of last year, and
nearly 260,000 new private-sector jobs were added in January. The job gains in recent
months have been relatively widespread across industries. In the public sector, by contrast,
layoffs by state and local governments have continued. The unemployment rate hovered
around 9 percent for much of last year but has moved down appreciably since September,
reaching 8.3 percent in January. New claims for unemployment insurance benefits have also
moderated.
The decline in the unemployment rate over the past year has been somewhat more rapid
than might have been expected, given that the economy appears to have been growing
during that time frame at or below its longer-term trend; continued improvement in the job
market is likely to require stronger growth in final demand and production. Notwithstanding
the better recent data, the job market remains far from normal: The unemployment rate
remains elevated, long-term unemployment is still near record levels, and the number of
persons working part time for economic reasons is very high.2
Household spending advanced moderately in the second half of last year, boosted by a
fourth-quarter surge in motor vehicle purchases that was facilitated by an easing of
constraints on supply related to the earthquake in Japan. However, the fundamentals that
support spending continue to be weak: Real household income and wealth were flat in 2011,
and access to credit remained restricted for many potential borrowers. Consumer sentiment,
which dropped sharply last summer, has since rebounded but remains relatively low.
In the housing sector, affordability has increased dramatically as a result of the decline in
house prices and historically low interest rates on conventional mortgages. Unfortunately,
many potential buyers lack the down payment and credit history required to qualify for loans;
others are reluctant to buy a house now because of concerns about their income,
employment prospects, and the future path of home prices. On the supply side of the market,
about 30 percent of recent home sales have consisted of foreclosed or distressed properties,
and home vacancy rates remain high, putting downward pressure on house prices.
More-positive signs include a pickup in construction in the multifamily sector and recent
increases in homebuilder sentiment.
Manufacturing production has increased 15 percent since the trough of the recession and
has posted solid gains since the middle of last year, supported by the recovery in motor
vehicle supply chains and ongoing increases in business investment and exports. Real
business spending for equipment and software rose at an annual rate of about 12 percent
over the second half of 2011, a bit faster than in the first half of the year. But real export
growth, while remaining solid, slowed somewhat over the same period as foreign economic
activity decelerated, particularly in Europe.
The members of the Board and the presidents of the Federal Reserve Banks recently
projected that economic activity in 2012 will expand at or somewhat above the pace
registered in the second half of last year. Specifically, their projections for growth in real GDP
this year, provided in conjunction with the January meeting of the Federal Open Market
Committee (FOMC), have a central tendency of 2.2 to 2.7 percent.3 These forecasts were
considerably lower than the projections they made last June.4 A number of factors have
played a role in this reassessment. First, the annual revisions to the national income and
product accounts released last summer indicated that the recovery had been somewhat
slower than previously estimated. In addition, fiscal and financial strains in Europe have
weighed on financial conditions and global economic growth, and problems in U.S. housing
and mortgage markets have continued to hold down not only construction and related
industries, but also household wealth and confidence. Looking beyond 2012, FOMC
participants expect that economic activity will pick up gradually as these headwinds fade,
supported by a continuation of the highly accommodative stance for monetary policy.
With output growth in 2012 projected to remain close to its longer-run trend, participants did
not anticipate further substantial declines in the unemployment rate over the course of this
year. Looking beyond this year, FOMC participants expect the unemployment rate to
continue to edge down only slowly toward levels consistent with the Committee's statutory
mandate. In light of the somewhat different signals received recently from the labor market
than from indicators of final demand and production, however, it will be especially important
to evaluate incoming information to assess the underlying pace of economic recovery.
At our January meeting, participants agreed that strains in global financial markets posed
significant downside risks to the economic outlook. Investors' concerns about fiscal deficits
and the levels of government debt in a number of European countries have led to substantial
increases in sovereign borrowing costs, stresses in the European banking system, and
associated reductions in the availability of credit and economic activity in the euro area. To
help prevent strains in Europe from spilling over to the U.S. economy, the Federal Reserve in
November agreed to extend and to modify the terms of its swap lines with other major central
banks, and it continues to monitor the European exposures of U.S. financial institutions.
A number of constructive policy actions have been taken of late in Europe, including the
European Central Bank's program to extend three-year collateralized loans to European
financial institutions. Most recently, European policymakers agreed on a new package of
measures for Greece, which combines additional official-sector loans with a sizable reduction
of Greek debt held by the private sector. However, critical fiscal and financial challenges
remain for the euro zone, the resolution of which will require concerted action on the part of
European authorities. Further steps will also be required to boost growth and
competitiveness in a number of countries. We are in frequent contact with our counterparts in
Europe and will continue to follow the situation closely.
As I discussed in my July testimony, inflation picked up during the early part of 2011.5 A
surge in the prices of oil and other commodities, along with supply disruptions associated
with the disaster in Japan that put upward pressure on motor vehicle prices, pushed overall
inflation to an annual rate of more than 3 percent over the first half of last year.6 As we had
expected, however, these factors proved transitory, and inflation moderated to an annual rate
of 1-1/2 percent during the second half of the year-close to its average pace in the preceding
two years. In the projections made in January, the Committee anticipated that, over coming
quarters, inflation will run at or below the 2 percent level we judge most consistent with our
statutory mandate. Specifically, the central tendency of participants' forecasts for inflation in
2012 ranged from 1.4 to 1.8 percent, about unchanged from the projections made last June.7
Looking farther ahead, participants expected the subdued level of inflation to persist beyond
this year. Since these projections were made, gasoline prices have moved up, primarily
reflecting higher global oil prices-a development that is likely to push up inflation temporarily
while reducing consumers' purchasing power. We will continue to monitor energy markets
carefully. Longer-term inflation expectations, as measured by surveys and financial market
indicators, appear consistent with the view that inflation will remain subdued.
Monetary policy
Against this backdrop of restrained growth, persistent downside risks to the outlook for real
activity, and moderating inflation, the Committee took several steps to provide additional
monetary accommodation during the second half of 2011 and early 2012. These steps
included changes to the forward rate guidance included in the Committee's post-meeting
statements and adjustments to the Federal Reserve's holdings of Treasury and agency
securities.
The target range for the federal funds rate remains at 0 to 1/4 percent, and the forward
guidance language in the FOMC policy statement provides an indication of how long the
Committee expects that target range to be appropriate. In August, the Committee clarified
the forward guidance language, noting that economic conditions-including low rates of
resource utilization and a subdued outlook for inflation over the medium run-were likely to
warrant exceptionally low levels for the federal funds rate at least through the middle of 2013.
By providing a longer time horizon than had previously been expected by the public, the
statement tended to put downward pressure on longer-term interest rates. At the January
2012 FOMC meeting, the Committee amended the forward guidance further, extending the
horizon over which it expects economic conditions to warrant exceptionally low levels of the
federal funds rate to at least through late 2014.
In addition to the adjustments made to the forward guidance, the Committee modified its
policies regarding the Federal Reserve's holdings of securities. In September, the Committee
put in place a maturity extension program that combines purchases of longer-term Treasury
securities with sales of shorter-term Treasury securities. The objective of this program is to
lengthen the average maturity of our securities holdings without generating a significant
change in the size of our balance sheet. Removing longer-term securities from the market
should put downward pressure on longer-term interest rates and help make financial market
conditions more supportive of economic growth than they otherwise would have been. To
help support conditions in mortgage markets, the Committee also decided at its September
meeting to reinvest principal received from its holdings of agency debt and agency
mortgage-backed securities (MBS) in agency MBS, rather than continuing to reinvest those
proceeds in longer-term Treasury securities as had been the practice since August 2010.
The Committee reviews the size and composition of its securities holdings regularly and is
prepared to adjust those holdings as appropriate to promote a stronger economic recovery in
the context of price stability.
Before concluding, I would like to say a few words about the statement of longer-run goals
and policy strategy that the FOMC issued at the conclusion of its January meeting. The
statement reaffirms our commitment to our statutory objectives, given to us by the Congress,
of price stability and maximum employment. Its purpose is to provide additional transparency
and increase the effectiveness of monetary policy. The statement does not imply a change in
how the Committee conducts policy.
Transparency is enhanced by providing greater specificity about our objectives. Because the
inflation rate over the longer run is determined primarily by monetary policy, it is feasible and
appropriate for the Committee to set a numerical goal for that key variable. The FOMC
judges that an inflation rate of 2 percent, as measured by the annual change in the price
index for personal consumption expenditures, is most consistent over the longer run with its
statutory mandate. While maximum employment stands on an equal footing with price
stability as an objective of monetary policy, the maximum level of employment in an economy
is largely determined by nonmonetary factors that affect the structure and dynamics of the
labor market; it is therefore not feasible for any central bank to specify a fixed goal for the
longer-run level of employment. However, the Committee can estimate the level of maximum
employment and use that estimate to inform policy decisions. In our most recent projections
in January, for example, FOMC participants' estimates of the longer-run, normal rate of
unemployment had a central tendency of 5.2 to 6.0 percent.8
As I noted a moment ago, the
level of maximum employment in an economy is subject to change; for instance, it can be
affected by shifts in the structure of the economy and by a range of economic policies. If at
some stage the Committee estimated that the maximum level of employment had increased,
for example, we would adjust monetary policy accordingly.
The dual objectives of price stability and maximum employment are generally
complementary. Indeed, at present, with the unemployment rate elevated and the inflation
outlook subdued, the Committee judges that sustaining a highly accommodative stance for
monetary policy is consistent with promoting both objectives. However, in cases where these
objectives are not complementary, the Committee follows a balanced approach in promoting
them, taking into account the magnitudes of the deviations of inflation and employment from
levels judged to be consistent with the dual mandate, as well as the potentially different time
horizons over which employment and inflation are projected to return to such levels.
Thank you. I would be pleased to take your questions.