Federal Reserve press conference, 2012-12-12 — Chair Ben Bernanke

Question (Jon Hilsenrath, Wall Street Journal): Jon Hilsenrath from the Wall Street Journal. Mr. Chairman, I just—I want to try to square up some numbers. The threshold that you announced today for when rate hikes might start is 6½ percent. The Committee’s assessment of the longer-run unemployment rate is 6 percent, or perhaps a bit lower, and the longer-run equilibrium fed funds rate is around 4 percent according to these projections. It suggests that when the Fed does start raising interest rates down the road, it might have to move fairly quickly to get to some equilibrium fed funds rate. Is that, specifically, is that the case and, more generally, can you talk about what this framework that you set up today says about the exit strategy that you had laid out some time ago and whether that’s evolving or changing?
Answer: Well, it’s a good question. So first of all, we don’t have a precise estimate of the long-run sustainable unemployment rate. The estimates that were provided in the Summary of Economic Projections today, as has been the case for a while, is 5.2 to 6.0 percent. So, it could be well less than 6½ percent, so that gives us some time. My anticipation is that the removal of accommodation after the takeoff point, whenever that occurs, would be relatively gradual. I don’t think we’re looking at a rapid increase. Of course, that depends on where inflation is and other conditions. But it’s—the path that we’re basing these numbers on is one that assumes, first of all, as you anticipated, assumes an increase in the funds rate first occurring some time after unemployment goes below 6½ percent, but does not necessarily assume a rapid increase after that. And I—what we said in our statement is that we would take a balanced approach. In other words, you know, once we get to that point, we may or may not raise rates at that point. We’ll look at the situation. But assuming that inflation remains well controlled, which I fully anticipate, I think that the rate of increase in rates would be moderate. This is consistent—the exit strategy that we put out is consistent with our statement today because the exit strategy was primarily about how we would normalize the balance sheet over time. And at this time we have not made any changes in that, and we believe that some increase in the size of our balance sheet is consistent still with that general sequence that we laid out in the minutes a year and a half ago. That being said, if the balance sheet grows by enough, we may have to reconsider the pace or timing of that, but I don’t see any changes that would, you know, radically change the time to normalization or the time to exit.

Question (Catherine Hollander, National Journal): Mr. Chairman, Catherine Hollander from National Journal. How concerned are you that markets will have to tank in order to get lawmakers to reach a deal on the fiscal cliff, and what do you make of their recent complacency? Is there a Wall Street–Washington disconnect?
Answer: Interesting question. Well, I certainly hope that markets won’t have to tank. I don’t—we want to have confidence, not just in markets but in businesses and households as well, and the best way the fiscal policymakers can achieve that is by coming to a solution as quickly as possible. Markets have obviously already responded to some extent, up and down; you can see from day to day how they respond to news about the negotiations. But on the other hand, it’s also true, if you look at the experience, I think the very informative experience of the debt limit debate in August of 2011, that both confidence and markets remain pretty sanguine up to pretty close to the point where it looked like there was actually a chance the debt limit would not be raised. And then, of course, there was a pretty sharp shock, particularly to confidence, about the time of the, you know, of the final debates. So it’s not unusual to see markets being complacent. Of course, there’s from a market point of view, there are sort of risks in both directions. Obviously, things go badly, but perhaps if things go especially well, that would be good news, and maybe right now markets are sort of taking an average of those two possibilities. But again, just to reiterate, I don’t think any policymaker, including the Fed, should be responding to markets. What we should be doing is making policy, you know, based on the fundamentals and doing what’s best for the economy and I hope that fiscal policymakers will follow that injunction as well.