Federal Reserve press conference, 2012-01-25 — Chair Ben Bernanke

Question (Steve Liesman, CNBC): Thank you. Steve Liesman, CNBC. Mr. Chairman, we’ve had several months of economic data that’s been stronger than most forecasters expected— employment was over 200,000, the unemployment rate’s come down to 8½ percent—but there seems to be very little mention of this recent strength in the statement. Do you and the Committee, Mr. Chairman, harbor doubts about the recent strength in the economy? And are you and the Committee baking in additional quantitative easing in order to achieve the growth rates that you’ve even forecast here? Thank you.
Answer: Steve, there’s certainly been some encouraging news recently. We’ve seen slightly better performance in the labor market, consumer sentiment has improved, industrial production has been relatively strong—so there are some positive signs, no doubt. At the same time, we’ve had mixed results in some other areas, such as retail sales, and we continue to see headwinds emanating from Europe, coming from the slowing global economy and some other factors as well. So, you know, we are obviously hoping that the strength we saw in the fourth quarter and in recent data will continue into 2012, but we’re going to continue to monitor that situation. I don’t think we’re ready to declare that we’ve entered a new, stronger phase at this point; we’ll continue to look at the data. We will, as I’ve said in my statement, and as we have in fact in the FOMC statement, you know, we continue to review our holdings—our portfolio holdings, securities, and we are prepared to take further steps in that direction if we see that the recovery’s faltering or if inflation is not moving toward target. So that’s something— that’s an option that’s certainly on the table. I think it would be premature to say definitively one way or the other, but we continue to look at that option, and if conditions warrant, we will certainly consider using it.

Question (Patrick Welter, Frankfurter Allgemeine Zeitung): Mr. Chairman, Patrick Welter from the Frankfurter Allgemeine Zeitung. I have two short questions. Your predecessor, Mr. Greenspan, once said about his personal inflation—long-term inflation goal that it would be 0 percent if appropriately measured. And I would like you to compare the inflation goal you told us about today with that statement. And, the second question is, Comparing what you did today, are you approaching more some kind of inflation targeters like the central bank of Sweden or Norway, or are you approaching more the European Central Bank, for example, which has some kind of inflation goal but is not really an inflation targeter?
Answer: Excellent questions. So, a literal reading of price stability would say inflation should be at zero. Now, there are some technical reasons why that may not be true. There are probably some measurement biases and other issues that mean that a measured value of inflation above zero is probably consistent with stable prices. But as we’ve talked about frequently, we set inflation—our inflation objective in a way that was consistent with both sides of the mandate: price stability—and 2 percent is low enough that we believe that it’s not going to extensively interfere with financial planning and economic planning on the part of households and businesses—but also in the interest of employment. A target for inflation that was zero would have several consequences. First, we would be spending maybe half of our time, or at least a significant amount of our time, in a deflationary zone. And we’ve seen in many instances that deflation can be bad for economic performance and bad for employment, and, therefore, setting an inflation target at zero would be not consistent with the other part of our mandate. Incidentally, related to that, a zero inflation rate would mean that nominal interest rates would be at very low levels, typically 2 to 3 percent or whatever they might be, and that would increase the risk and probability that we would be in a situation like today where we really can’t cut the short-term interest rate any further. So I think there are good reasons from a dual-mandate perspective to have inflation greater than 2 percent. And I would add that, you know, if you look at central banks around the world, whether they are nominal inflation targeters or not, that 2 percent is basically the number that most central banks use; the ECB, many other central banks either use 2 percent or a range around 2 percent. So this is not at all different from what many other central banks do. Now, are we inflation targeters? If by “inflation targeter” you mean a central bank that puts top priority on inflation and other goals, like employment, as subsidiary goals, then the answer is no. We are a dual-mandate central bank: We put equal weight on price stability and maximum employment; those are the goals given to us by the Congress. And so, in that respect, as I mentioned earlier, I think, to Greg, we’re not absolutists: If there’s a need to let inflation return a little bit more slowly to target in order to get a better result in employment, then that’s something that we would be willing to do. Having said all that, I think it’s worth noting that even banks that—central banks that call themselves inflation targeters typically pay at least some attention to other parts of the economy: employment, growth, financial stability, and the like. So I don’t think there’s really any central bank, or very few, at least, that focus only on inflation. But again, in terms of terminology, I guess I would reject that term for the Federal Reserve because we are going to be evenhanded in treating the price stability and maximum employment parts of our mandate on a level footing.

Question (Zachary Goldfarb, Washington Post): Thank you. Zach Goldfarb from the Washington Post. Two questions. First, can you clarify whether if actual economic conditions match their projections, that’s an acceptable future course, or that would require additional easing? And secondly, in the past, a number of times you said that even when interest rates are at the zero bound, the Fed can still have a significant impact on influencing economic growth; do you still believe that the Fed has the capacity to deploy tools that would have a significant impact on bringing down unemployment at a faster pace than we see in these projections if it chose to do so?
Answer: On the first question, I, you know—as was pointed out by Steve, for example—we’ve had some good data recently. I think there’s some uncertainty about where the economy is going, and we want to continue to observe how the economy is developing. But I would say that, as I’ve said on several—in several answers, that if recovery continues to be modest and progress on unemployment very slow, and if inflation appears to be likely to be below target for a number of years out—so the configuration we’re talking about in the projections—then I think there would be a very strong case, based on our framework, for finding a different—additional tools for expansionary policies or to support the economy. So we’ll continue to look at the different options and try to decide what might be most effective. We are in a difficult situation in terms of the effectiveness of policy tools. My own view, thinking about the effects, for example, of additional purchases—additional securities purchases, I’ve been pretty satisfied in the sense that—in the following sense, that purchases do seem to have the desired effects on financial conditions: They tend to ease financial conditions, they tend to lower interest rates, they tend to strengthen asset prices. And those are exactly the kinds of things that monetary policy normally does in order to try to provide stableness to the economy. What has been a bit more uncertain is the effectiveness of the transmission mechanism. And we have seen some developments in the economy that have probably weakened the effectiveness of policy, including, notably, the housing sector, where one would expect—with mortgage rates below 4 percent, one would expect to see more activity than we’ve been seeing. And the problems in housing finance and so on are part of the reason that the expansionary stimulus is not feeding through as much as we would like to the real economy. I would not say, though, that our policies are—that we’re out of ammunition. No, I think we still have tools, but we need to further analyze and study those tools and try to make comparisons in terms of effectiveness, risks, and the like. So I think we still have a process to figure out what is the most effective approach. Does that—yeah, okay.