Federal Reserve press conference, 2011-06-22 — Chair Ben Bernanke

Question (Robin Harding, Financial Times): Robin Harding from the Financial Times. Mr. Chairman, you now expect that both headline and core inflation would be close to your long-run objective in 2012 and 2013 while unemployment remains high. Does that mean you think the medium-term tradeoff between inflation and growth has got worse? And, furthermore, can I ask—Has the unexpected rise in core inflation changed your understanding of the output gap? Thank you.
Answer: Well, to address the latter question first, that’s a possibility. As you saw from the—but as you saw from the projections we just put out, the Committee— every member of the Committee sees the long-run unemployment rate—the NAIRU, as it’s called by economists—somewhere around 5½ percent, basically. So that would suggest that the Committee still believes that the output gap is quite large. With respect to core inflation, some of the effects, at least there, are also temporary. To name two examples, the supply chain disruptions brought about by the Japanese disaster have led to a very significant increase in auto prices, both new and used automobiles, last month. As these problems are resolved—and they appear to be very much on the way to being resolved—we would assume that the auto prices would come back down and incentives would be restored as competition increases and costs are reduced. So that’s one example. Another would be the fact that energy prices have passed through to a number of—despite the fact that core is defined excluding energy, that’s only the energy, direct energy products—things like airfares, for example, which are very sensitive to the cost of jet fuel, are also a part of the core. So you would imagine that, as the price of oil declines, that you would see some bounce—decline in, also in—in the core measures of inflation. So given that there’s still a large output gap, given that inflation expectations remain well anchored, given that some of the temporary factors affecting inflation, including core inflation, are likely to recede, I think it’s reasonable to think that core inflation will fall back towards mandate-consistent levels. That being said, I think it’s the case, if you look at the projections that we have marked up a little bit, the near-term and core projections.

Question (Craig Torres, Bloomberg): So, all of you have to make policy projections on appropriate policy. So to get to this world of 2013, when we have above-trend growth and unemployment falling and inflation at a really nice level, what would your appropriate policy be to get there? Would it be an early gradual exit, a late steep exit, or no exit?
Answer: Well, I don’t think it would be constructive for me to give you a tentative projection because, obviously, as I’ve indicated, there’s simply no alternative but to watch the incoming data and to make judgments both in terms of when the exit should begin, which, at this point, is going to depend on incoming data, but also what the slope of tightening would be, how quickly we would tighten. So, you know, we all have estimates in our minds, but, you know, that’s a very far cry from saying that this is what’s going to happen. In a sense, the FOMC has to forecast its own behavior in the same way it forecasts the economy. And that forecast can change. And given developments in the economy, we might end up doing something different than what we currently think is most likely.