Federal Reserve press conference, 2011-04-27 — Chair Ben Bernanke

Question (Unknown Reporter, nan): Mr. Chairman, tomorrow we’re going to get a pretty weak first-quarter GDP number. Your own projections for the year have been downgraded in this meeting. How— first of all, what do you see as the causes of the weak growth to start the year, even with monetary easing, even with payroll tax cuts? And what’s behind this weaker forecast for 2011 GDP?
Answer: You’re correct. We haven’t seen the GDP number yet. But we, like most private-sector forecasters, are expecting a relatively weak number for the first quarter, maybe 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 will presumably be made up in a later quarter; weaker exports—and 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, and 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—like weaker construction and possibly just a bit less momentum in the economy.

Question (Jon Hilsenrath, Wall Street Journal): Chairman, Jon Hilsenrath from the Wall Street Journal. Many Americans are upset that gasoline prices are rising so fast and that food prices are also going up. Can you talk about whether there’s anything that the Fed can or should do about that? And can you also comment or elaborate on the increase that we’ve seen in the inflation forecasts that the Fed put out today?
Answer: Sure. Thanks, Jon. So, first of all, gasoline prices obviously have risen quite significantly. And we, of course, are watching that carefully, that 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 very 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. So it’s a double whammy coming from higher gasoline prices. Now, our—our interpretation of the increase in gas prices is the economist’s basic mantra of supply and demand. On the one hand, we have a rapidly growing global economy. Emerging market economies are growing very quickly, and 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 and the last decade has come from emerging market economies. In the United States, our demand for oil—our imports have actually been going down over time. So the demand is coming from a growing economy where we’ve seen about a 25 percent increase in emerging market output in the last—since before the crisis. And on the supply side, as everybody knows who watches television, we’ve seen disruptions in the Middle East and North Africa, in Libya, and in other places that have constrained supply. That supply has not been made up, and that, in turn, has driven gas prices up quite significantly. So, again, this is a very adverse development. It accounts in the short run for the increase in our—pretty much almost all of the increase in our inflation forecast, at least in the very near term. There’s not much 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 would be much more difficult to extinguish. Again, our view is that, most likely—of course, we don’t know for sure, but we’ll be watching carefully—our view is that gas prices will not continue to rise at the recent pace, and as they stabilize or even come down if the situation stabilizes in the Middle East, that that will provide some relief on the inflation front. But we’ll have to watch it very carefully.

Question (John Ydstie, NPR): John Ydstie with NPR News. Mr. Chairman, it’s the view of a lot of economists that the second round of quantitative easing hasn’t done much to help the economy. What positive effects can you point to directly? And if there are positive effects, can you really afford to end the program in June, with the unemployment rate still around 9 percent?
Answer: Thank you. Well, 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. And 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 that one would expect if one was doing an ordinary easing of policy via a reduced federal funds rate. And, indeed, we saw the same types of financial market 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 in 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—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 if one thought that this—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 that, 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 and 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 tradeoffs are getting—are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And, in my view, if we’re going to have success in creating a long-run sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those—both parts of the mandate as we—as we choose policy.

Question (Darren Gersh, Nightly Business Report): Darren Gersh with Nightly Business Report. You’ve talked a lot in the past about the problem of long-term unemployment. Can the Fed effectively reduce long-term unemployment?
Answer: Well, first, you’re absolutely right. Long-term unemployment in the current economy is—is the worst—really the worst it’s been in the postwar period. Currently something like 45 percent of all the unemployed have been unemployed for six months or longer. And 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 have built up. And 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 actually lead unemployment to remain very high for a protracted period. So it is a very significant concern. And it’s one of the reasons that—that the Federal Reserve has been so aggressive. By getting unemployment down, we hope to bring back to work some of the people who’ve been out of work as long as they have and, in that respect, try to avoid the longer-term consequences 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.