Federal Reserve press conference, 2013-03-20 — Chair Ben Bernanke

Question (Marcy Gordon, Associated Press): Thank you. Marcy Gordon with the Associated Press. Mr. Chairman, the statement mentions that fiscal policy has become more restrictive. How much of a drag on growth do you see from the Social Security tax increase and the across-the-board spending cuts that went into effect on March 1? And is it possible that the Fed might see a need to provide more support to the economy if that—because of that drag, the drag on fiscal?
Answer: Well, our analysis is fairly comparable to analysis that the Congressional Budget Office has presented to the Congress. And they estimate that putting together all the fiscal measures, including the fiscal cliff deal, the sequester, and other cuts, that federal fiscal restraint in 2013 is cutting something like 1½ percentage points off of growth, which, of course, is very significant. So, that is an issue for us. We—you know, we take as given what the fiscal authorities are doing. The economy is weaker. Job creation is slower than it would be otherwise. And so, that is one of the reasons that our policy has been as aggressive as it is. That being said, as I’ve said many times, monetary policy cannot offset a fiscal restraint of that magnitude, and so the final outcome will be worse—or, in terms of jobs—than would have been the case with less fiscal restraint. I want to emphasize that I do believe that long-term fiscal stability is extremely important. And I urge Congress and the Administration, as I always do, when I go to testify to do whatever is necessary to put us on a sustainable fiscal path going forward. But, in doing so, I think it’s a good idea to pay attention to the impact in the near term on what is still not a completely satisfactory recovery.

Question (Steven Beckner, MNI): Mr. Chairman, good afternoon. You earlier stressed that you want to see improvement in the labor market sustained, and that to make that determination, you have to have adequate economic growth, and yet the projections in the revised Summary of Economic Projections has kind of a—it seems like an Okun’s law dilemma there. You—they have reduced the projected rate of unemployment, but, at the same time, lowered the growth forecast. So how do you square those two? How do you get sustained improvement in the labor market if the economy is going to slow down?
Answer: Well, if in fact that happens, it’s an issue, obviously. There’s been some disconnect, at least in the short run, between unemployment rate changes and growth during this recovery, and there’ve been periods, at least, where unemployment has fallen relatively quickly even though growth has been more limited. So we’re just going to have to monitor developments in the economy and see what happens. You’re right that we’re not forecasting extraordinarily strong growth. But it is also true, as you—I think, you noted, that our projections for unemployment in the fourth quarter are noticeably lower than they were in September when we first announced this asset purchase program. So there has been some improvement in the outlook, as measured by that metric. But you’re right. You know, we do need to see a sustained improvement. One month, two months doesn’t cut it. And, normally, you would expect that you would need to see a reasonable pace of GDP growth in order to achieve that. So we’re just going to have to keep providing support for the economy and see— you know, see how things evolve.

Question (Ben Weyl, Congressional Quarterly): Hi, Mr. Chairman. Ben Weyl, Congressional Quarterly. There’s a lot of talk about whether certain institutions are too big to fail. And I wanted to get at a different, if related, question. In 1980, let’s say, there was about—the financial sector comprised about 5 percent of the U.S. economy, U.S. GDP; now it’s about 9 percent. And I’m wondering if you think that shift is beneficial to the U.S. economy?
Answer: I don’t think I know the answer to that question. Certainly, the financial system has—I could argue two ways. I could say, well, the U.S. economy grew pretty well between 1945 and 1975 or 1980. And the financial system was much simpler and didn’t have a lot of exotic derivatives and so on. So that would be—that would be one way to argue that maybe, you know, all of this extra financial activity is not justified. On the other hand, the world is a lot more complicated. We’re a lot—the world is a lot more international. You have large multinational firms that are connecting resources, savers, and investors in different countries. There’s a lot more demand for risk sharing, for liquidity services, and so on. So, I think, based on that and based on the innovations that information technology have created in lots of industries, you would expect financial services to be somewhat bigger. So I don’t really know the answer to that question. I think that my predecessor Paul Volcker’s claim that the only contribution to the financial industry is the automatic teller machine might be a little exaggerated. I know that people—some people have that view. Again, I don’t know the answer. I think that a somewhat bigger financial sector can be justified by the wider range of services and the more globalized financial economic system that we have. But the exact number, I can’t really say.