Federal Reserve press conference, 2012-09-13 — Chair Ben Bernanke

Question (Donna Borak, American Banker): Chairman, Donna Borak with American Banker. My question pertains to Basel III. Community bankers, as you know, have been very worried about the impact that these rules will have on their banks, especially given the fact that there’s been some industry consolidation, and some have even questioned whether or not the Fed has actually looked at the impact that the rules would have on smaller-sized institutions. So my question for you is, will there be relief for the smaller institutions, and can you provide any assurance that this will not be a one-size-fits-all regulation?
Answer: Certainly. We are very interested in and very focused on community banks at the Fed. We believe they play a very important role in our economy and in our communities. We have a number of ways of communicating with community banks. It includes our advisory council made up of community bankers. It includes a special set of programs we have to reach out and talk to community bankers. So we are very interested in their views. I speak regularly to conventions and the like and talk to various groups. In terms of Basel III, of course, it’s not one-size-fits-all. Many—and, indeed, many of the most difficult, complex regulations apply only to the largest and most complex institutions—for example, the capital surcharge that the largest banks have to hold, the complex rules applying to trading books and derivatives, the extra supervision under section 165, the orderly liquidation authority, the liquidity rules—the whole range of things that apply only to the largest, most complex, and internationally active banks. For the smaller banks, what our proposed rule does is try to strengthen their capital, and many small banks will already meet those capital requirements. Smalls banks tend to be very well capitalized. But, of course, it’s important for small banks to be well capitalized as well as large banks. And there’s a leverage requirement. But, again, most of the rules, most of the—particularly the most complex rules in Basel III will not apply to the smaller banks. Indeed, banks under $500 million have special exemptions from these rules. Having said all of that, I remind you that what we have now is a proposed rule, and we’re receiving comment on that. We have a subcommittee of our supervision committee with two experienced—one community banker, one community bank supervisor on it from our Board who are particularly interested in making sure that the rules are not excessively onerous, and we will be looking at the comments and trying to make sure that we take into account the needs of community banks when we put out the final rule.

Question (Michelle Fleury, BBC): You said that you can’t cure all ills, that you haven’t got strong enough tools to deal with the unemployment problem. I was curious to know what policy actions you’d like to see outside the Fed to try and address this. And, secondly, also on the “fiscal cliff,” the expected spending cuts and tax increases, how concerned are you about that? And what ammunition do you have to deal with that, if that becomes a problem?
Answer: Well there’s, again, a range of areas where actions could be taken, and I can’t really prescribe all those possible responses. I would focus, I think, on the fiscal side. We currently have the so-called fiscal cliff. If no action is taken, there’s going to be a very substantial increase in taxes and cut in spending on January 1 of the coming year. The CBO has suggested that if that’s allowed to take place, that it would cause unemployment to begin to rise, and it might throw the economy back into recession. So I think one very basic thing that could be done to help address the recovery—the weakness of the recovery and the need for more employment—would be to address the fiscal cliff while simultaneously addressing longer-term fiscal sustainability issues which remain, of course, very serious. So that’s one area where there is a lot of potential benefit. If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock, so we’d have to think about what to do in that contingency. So I think it’s really important for the fiscal policymakers to, you know, work together and try to find a solution for that.

Question (Steven Beckner, MNI): Steve Beckner of MNI, Mr. Chairman. There have been concerns raised, questions raised by people like Columbia Professor Michael Woodford and others about the credibility of your forward guidance on the path, the future path of the federal funds rate— the idea being that, to the extent it’s conditional, it’s not really convincing and doesn’t provide the kind of confidence that you referred to. Now, on this latest statement, you’ve removed some of that conditionality. I am particularly struck by the statement that “the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” I assume that was done to make your forward guidance more credible, and yet the question remains whether, you know, as the economy picks up steam, whether the FOMC will really follow through and keep rates low or whether you will do as the Fed has always done and begin to raise the funds rate.
Answer: Well, that’s an important question. Michael Woodford— who, by the way, is my former colleague and coauthor and friend, so I know him quite well, and I know his works quite well—I think, actually, the thrust of his research is that forward guidance—communication about future policy—is, in fact, the most powerful tool that central banks have when the interest rate is close to zero. And he advocates policies like nominal GDP targeting, for example, that would essentially require credibility lasting many years, the implication being that the Fed would target the nominal level of GDP and promise to do that for many years in the future even if inflation, you know, rose as part of that policy. So his own perspective is that credibility is the key tool that central banks have in order to get traction at the zero lower bound. Whether we have the credibility to persuade markets that we’ll follow through is an empirical question. And the evidence, which I also, again, discussed in my remarks recently, is that when we’ve announced extended guidance, that financial markets have responded to that, that private-sector forecasters have changed their estimates of what unemployment and inflation will be when the Fed begins to remove accommodation. So the empirical evidence is that our announcements do have considerable credibility. And I think there’s a good reason for that, which is that we have talked a lot both publicly and privately about the rationale for maintaining rates low even as the economy strengthens, and I think the basic ideas are broadly espoused within the Committee. And so there is a consensus that even as the personnel change and so on going forward, that this is the appropriate approach, and that by following through, we will have created a reserve of credibility that we can use in any subsequent episodes that occur.

Question (Don Lee, Los Angeles Times): There doesn’t seem to be that many people who could qualify for refinancings. Can we expect a meaningful effect on an increase in refinancing activity?
Answer: Well, I think there’ll be some, but you get more benefit when people buy homes. And sales of homes are down still, but they have been rising steadily, and we’re trying to provide more support for people who want to go out and buy homes, construct homes, and also those who want to refinance. But it’s the purchases of new homes that generate the construction activity, the furnishing, all those things that help the economy grow.