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

Question (Kevin Hall, McClatchy): Okay, Mr. Chairman. Thank you. The two questions, taking the Goldfarb rule into effect, one having to do with the CPI, there’s a lot of debate now with the Boehner plan about this chained CPI. As an econ—not as a Fed Chairman but as an economist—is there a logic in going to that? Do you think it’s a move that should be done separate from the politics of it? And again, with your economist hat, the labor market, you talked about the importance, not looking at the 6.5 percent threshold, but the broader conditions. A big debate—Steve Liesman’s nemesis talks a lot about people being beamed to Mars. In your mind, what is happening in the job market? Are we creating jobs? Is that why it’s coming down or is it because people—the degree of discouraged workers? What is your sense of how quickly it’s fallen because of new employment?
Answer: So, on the first question, the chained CPI versus the fixed-weight CPI is a technical issue. The chained CPI is technically better, according to most economists, because it allows for changes in the mix of goods and services that people actually consume more effectively. However, whether, you know, whether that’s more appropriate for, say, Social Security indexing or not, I think that’s ultimately a political decision. I suppose a rejoinder would be that neither the CPI nor the chained CPI may necessarily be a particularly good measure of the cost of living for Social Security recipients. So, those are the kinds of questions that Congress is going to have to deal with. Second part of your question was? Yes. Well, you know, you can see the comparison by looking, for example, at the household survey, which gives estimates of how many people are added to the labor force, how many are added to the employed, how many people are leaving the labor force, and it’s true that part of the decline in unemployment—and indeed all of it in the last reading, but over the recovery, part of the decline in unemployment has come from declines in participation rates, that is, people leaving the labor force. Some of that decline in participation appears to be due to longer-run factors, aging and changing patterns of work among women. So those things were probably not directly related to the recession, for example. But beyond that downward trend, there’s been some additional decline in labor force participation, and in the ratio of employment to population, which presumably is linked to discouragement about the state of the labor force. So that certainly is part of the issue. That being said, obviously there has been a good bit of job creation. You can see that either in the household survey or in the payroll establishment survey. So I think there’s no doubt that the labor market is considerably better today than it was two years ago, there’s not any question about that. But it’s also the case that many indicators of the labor market remain quite weak, ranging from the number of long-term unemployed to the number of people who have part-time work who would like full-time work. Wage growth obviously is very weak, and I could go on. So, it may be that the labor market is even a bit weaker than the current unemployment rate suggests, but I think that it is nevertheless the case that there has been improvement since the trough a couple of years ago.

Question (Steven Beckner, MNI): Mr. Chairman, Steve Beckner of Market News International. With the federal government borrowing roughly $1 trillion a year and now with the Fed on pace to buy roughly a trillion dollars a year in bonds, are you concerned about a public, and possibly global, perception that the Fed is accommodating not just growth but accommodating federal borrowing needs, and are you concerned about what this might do to the Fed’s credibility, and the credibility of U.S. finances in general, and the credibility of the dollar as the world’s leading currency?
Answer: Well, first of all, just a couple of facts. The—we’re buying Treasuries and mortgage-backed securities, about half and half, roughly. So we’re buying considerably less than the Treasury is issuing and, moreover, the share of outstanding Treasuries that the Federal Reserve owns is not all that different from what it was before the crisis, because while our holdings have increased, so has the—obviously the stock of Treasuries in public hands. So it’s not quite evident that there has been such a radical shift there. You know, we’ve been increasing our balance sheet now for some time, and we’ve been very clear that this is a temporary measure. It’s a way to provide additional accommodation to an economy which needs support. We’ve been equally clear that we will normalize the balance sheet, that we will reduce the size of our holdings and—whether by letting them run off or by selling assets in the future. So this is, again, only a temporary step. It would be quite a different matter if we were buying these assets and holding them indefinitely. That would be monetization. We’re not doing that. We are very clear about our intentions. And I think up until now, it seems our credibility has been quite good. There is not any sign either of current inflation or of any—there’s no strong evidence that there are any increases in inflation expectations for that matter, looking at financial markets, looking at surveys, looking at economic forecasts, and so on. So, this is one of the things that we have to look at. Remember, I talked earlier about the potential costs of a large balance sheet. We want to be sure that there’s no misunderstanding, that there’s no effect on inflation expectations from the size of our balance sheet. That’s one of the things we have to look at, but as to this point, there just really is no evidence that people are taking it that way. And I guess it’s worth pointing out—of course we’ve been very focused on the United States here, but we’re not the only central bank that has increased the size of its balance sheet. The Japanese, the Europeans, the British have all done the same, and very much more or less to the same extent in terms of the fraction of GDP, and I think the sophisticated market players and the public understand that this is part of a collective need, a need to provide additional accommodation to weak economies and not an accommodation of fiscal policy.