Federal Reserve press conference, 2012-04-25 — Chair Ben Bernanke

Question (Jon Hilsenrath, Wall Street Journal): Mr. Chairman, Jon Hilsenrath from the Wall Street Journal. The Fed has been forecasting for some time that inflation would fall to 2 percent or below. The latest measures of inflation suggest that the core PCE is at the higher end of that range and many other measures are above 2 percent. I noticed that in your forecast today that the upper end of your forecasts all the way through 2014 have increased. Do you see a risk that the disinflationary forces in the economy might not be as strong as the Fed had been projecting for some time?
Answer: Well, I would just say, first, that our projections still have inflation very close to our 2 percent target. As you point out, core inflation and some other measures of underlying inflation have been a little stronger than expected. But I would say first that some of the movement in the first quarter, for example, seems to have come from transitory sources like nonmarket components. And the fundamentals of inflation—in particular, inflation expectations; the amount of slack in the economy; the commodity price behavior, which has been relatively well-controlled in recent months—all of those things suggest that inflation is going to stay close to or perhaps a bit below our 2 percent target. Now, as I mentioned in the opening remarks and as we said in our briefing, the recent rise in gasoline prices has created a temporary bulge in headline inflation, in overall inflation, but we expect that to pass through the system and, assuming no new shocks in the oil sector, inflation ought to moderate to about 2 percent later this year.

Question (Pedro Da Costa, Reuters): How much more weakness would you need to see for QE3 to be in place? Would you need to see an actual recession take place?
Answer: The question is, you know, “How much more weakness do we need?” The Committee has to make those assessments, and we’ve been working to try to provide more-explicit guidance, quantitative guidance about our policy reaction function, but so far, you know, we haven’t really done that. And I can only say qualitatively that the Committee will continue to look at the evolution of the outlook, try to assess whether unemployment is making sufficient progress towards our objectives, and, in particular, whether the recovery is still continuing. And we remain prepared to use balance sheet tools to support the recovery and to help make sure that unemployment continues its downward path towards longer-run normal levels.

Question (Binyamin Appelbaum, New York Times): Unemployment is too high, and you said you expect it to remain too high for years to come. Inflation is under control, and you say that you expect it to remain under control. You say that you have additional tools available for you to use, but you’re not using them right now. Under these circumstances, it’s really hard for a lot of people to understand why you are not using those tools right now. Could you address that? And specifically, could you address whether your current views are inconsistent with the views on that subject that you held as an academic?
Answer: Yeah. Let me tackle that second part first. So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. Our—my views and our policies today are completely consistent with the views that I held at that time. I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation—that is, falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer—are not exhausted, there are still other things that the central bank can do to create additional accommodation. Now, looking at the current situation in United States, we are not in deflation. When deflation became a significant risk in late 2010, or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target. Likewise, we have been aggressive and creative in using non-federal-funds-rate-centered tools to achieve additional accommodation for the U.S. economy. So the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation, and, clearly, when you’re in deflation and in recession, then both sides of your mandates, so to speak, are demanding additional accommodation. In this case, it’s—we are not in deflation, we have an inflation rate that’s close to our objective. Now, why don’t we do more? Well, first I would again reiterate that we are doing a great deal; policy is extraordinarily accommodative. We—and I won’t go through the list again, but you know all the things that we have done to try to provide support to the economy. I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction—a slightly increased pace of reduction in the unemployment rate? The view of the Committee is that that would be very reckless. We have—we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been be able to take strong accommodative actions in the last four or five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

Question (Akio Fujii, Nikkei): Thank you, Chairman. I am Akio Fujii from Nikkei newspaper. My question is follow-up for your comment about Japan and U.S. Now, are you confident U.S. economy would avoid long-term stagnation like we had in Japan, or so-called Japanization? And if it’s the case, only policy response make a difference of Japan and U.S., or are there any other factor make difference?
Answer: Well, I think the—I would draw two distinctions between the U.S. and Japan, or the Japanese experience. The first is that, as I mentioned earlier—and I think this is very important—is that we acted aggressively and preemptively to avoid deflation. Now, of course, Japan had a much bigger bubble and a much bigger shock when the bubble collapsed, and so these differences may be certainly understandable. But, again, we did avoid deflation. The other thing which I think we have done reasonably well here in the United States was that we moved fairly quickly to make sure that our banks were recapitalized and were recognizing their bad assets. And I think the stress tests that we conducted last month are good evidence that the U.S. banking system is considerably stronger and, indeed, much more resilient than it was a couple of years ago. So those two things are positives and would tend to suggest that we will avoid some of the problems that Japan has faced. That being said, I think it’s always better to be humble and just to, you know, avoid being too confident. And we need to continue to maintain a strong monetary policy support to make sure that the economy continues on a recovery path and returns to a more normal situation.