Federal Reserve press conference, 2012-09-13 — Chair Ben Bernanke

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

Question (Robin Harding, Financial Times): Robin Harding from the Financial Times. Mr. Chairman, is this the limit of what the Fed could do? You refer in your statement to other policy tools. If the unemployment situation doesn’t improve, then what other measures do you have available? Thank you.
Answer: Well, there’s a variety of possibilities, and we continue to look at all different options. But the two primary types of tools, as I’ve discussed, are balance sheet actions—and, of course, we can restructure those, change those in various ways; the other type of tool is communication tools. And we could—we continue to work on how best to communicate with the public and how best to assure the public that the Fed will remain accommodative long enough to ensure recovery. So, working with our communications tools, clarifying our response to economic conditions, might be one way in which we could further provide accommodation.

Question (Craig Torres, Bloomberg): Hi, Mr. Chairman. Someone told me that less than 1 percent of all mortgages originated in the past 18 months went to borrowers with impaired credit history. So when we talk about people and a Main Street policy, it seems like you’re struggling, like many other central banks, and that’s to get the low rates down to—the challenge is to get them to people who really need them, people who are paying high rates or companies with somewhat fragile balance sheets. So, given that’s the case—I mean, you guys got involved in markets when they were dysfunctional in the crisis. What’s your appetite for doing more-targeted credit programs if, post-election, you had a Treasury Secretary and a Congress that was willing to underwrite some of the credit risk?
Answer: Well, now you’re talking about congressional programs, and I don’t, you know, I don’t advocate specific programs. It’s up to them to make those decisions. I think we’re seeing modest improvement in mortgage markets. One thing that’s helping is a stronger housing market. One reason that lenders have been very constrained is they are worried about further house price declines that will make the collateral worth less than the loan. As house prices have begun to rise, as the economy has gotten a little stronger, lending standards have eased just a bit. There’s also been other changes which are useful. I note, for example, that the FHFA and the GSEs have recently changed their policy on putbacks so that banks will have more certainty about under what conditions a mortgage will be put back to them if it defaults. So I think there’s number of things in train that will make the mortgage markets a little bit more open, and that is one factor, actually, that could make our policy more effective rather than less effective over time—if more people have access to mortgage credit, more people can take advantage of the low rates that we’re providing.

Question (Greg Ip, The Economist): Greg Ip of the Economist. Mr. Chairman, one of the innovations of your statement today is that you have for the first time explicitly predicated your monetary policy action on the achievement of explicit economic goals, in this case a substantial improvement in the labor market. Could you give us some explanation of how that conditioning will make your policy more effective than if you had simply done as you previously have: announced the policy and then conducted it? And a technical question: When “Operation Twist” ends, do you anticipate adjusting the size of your asset purchases in order to maintain the $85 billion monthly flow of long-term asset purchases?
Answer: On the latter, when Operation Twist ends, we will be looking at the whole set of asset purchases in order to make decisions. We’ll be looking at the state of the economy, as we described in the statement. In particular, what’s the state of the labor market, what’s the state of the outlook for economic growth? On conditioning, our policies have always been conditional in that we’ve always been clear that our asset purchases, for example, were reviewed periodically to see if they were still necessary, if they needed to be expanded. We did extend the maturity extension program, for example, when we thought that more support was needed for the economy, so our policies have always had a significant element of conditionality. But the idea here is to make that more explicit, more transparent to the public, make it more obvious that the Fed will do what’s needed to provide the support for the economy. And we hope that what that will do is provide a bit more assurance, maybe a bit more confidence, that the Fed will be there to do what it can. Again, we’re not promising, you know, a cure to all these ills. But what we can do is provide some support, and by assuring the public that we will be prepared to take action if the economy falters, we’re hopeful that that will increase confidence and make people more willing to invest, hire, and spend.