Federal Reserve press conference, 2013-09-18 — Chair Ben Bernanke

Question (Joshua Zumbrun, Bloomberg): Mr. Chairman, Josh Zumbrun from Bloomberg News. You indicated that you can see the Fed lowering the pace of purchases once the economy starts to grow faster, in line with what the Fed’s projected. For about the past four years, the Fed has been projecting that growth would quicken to about 3 percent, and it never has. So, at what point are you decide—going to decide that other costs and benefits are the reason that you’re making the decision? Are we getting close to that having to be a deciding factor even if you don’t get the growth forecast, the way you haven’t the past four years? And does the complication of this— this is kind of a second question, but I’m going to do it anyway—does the complication of this mean that you need a press conference to make a tapering decision?
Answer: Well, you’re certainly right that we have been over- optimistic about out-year growth. There are a number of reasons for that. One reason for it, though, is that it appears—and I talked about this in a speech last year—it appears that, as part of the aftermath of the financial crisis, that, at least temporarily, the potential growth rate of the economy has been slowed, perhaps because new businesses are not being formed at the same rate, innovation may not be translated into new technologies at the same rate, investment is slower, et cetera. So it appears, again, that the potential rate of growth of the economy has been slowed somewhat, at least temporarily, by the recession and the financial crisis, and you can see that in the slower productivity figures. Now, we have—you know, we haven’t anticipated that slowdown in productivity, and that’s one of the main reasons why we haven’t anticipated the relatively slow growth. Now, it’s important to recognize though that what monetary policy affects is not the potential rate of growth, long-run rate of growth, but rather the cyclical part, the deviation of output and employment from its normal level. And in predicting the amount of slack in the economy, so to speak, we’ve done a little better. Our predictions of unemployment, for example, have been better than our predictions of growth. And, in particular, one thing that’s been quite striking is that unemployment—we were too pessimistic on unemployment for this year. Unemployment has fallen faster than we anticipated. So, in that respect, we were too pessimistic rather than too optimistic. So, we’ll continue to do the best we can. We’re looking, again, to see confirmation of our broader scenario, which basically is that we’ll continue to see progress in the labor market, that growth will be sufficient to support that progress, and that inflation will be moving back towards target, and that’s what will determine our policy decisions. In terms of press conferences, I think it’s important to say that there’s an understanding in the Committee that we’ve had for a while, that there are eight “real” meetings every year—that every meeting is a meeting in which any policy decision can be taken. And, should anything occur at a meeting without a scheduled press conference that requires additional explanation, we certainly could arrange a public, on-the-record conference call or some other way of answering the media’s questions.

Question (Peter Barnes, Fox Business): Peter Barnes, Fox Business, sir. You mentioned fiscal issues in the statement today. Are you concerned about a government shutdown? We’re hearing more about that possibility. Did that come up in your discussions at this meeting? What do you think would be the impact of a government shutdown on the economy, and what could the Fed’s—or, would the Fed be prepared to respond to that and help the economy with additional accommodation, for example, additional asset purchases? Thank you.
Answer: Well, a factor that did concern us in our discussion was some upcoming fiscal policy decisions. I would include both the possibility of a government shutdown, but also the debt limit issue. These are obviously, you know, part of a very complicated set of legislative decisions, strategies, battles, et cetera, which I won’t get into. But it is the case, I think, that a government shutdown—and perhaps, even more so, a failure to raise the debt limit—could have very serious consequences for the financial markets and for the economy, and the Federal Reserve’s policy is to do whatever we can to keep the economy on course. And so, if these actions led the economy to slow, then we would have to take that into account, surely. So this is one of the risks that we are looking at as we think about policy. That being said, you know, again, our ability to offset these shocks is very limited, particularly a debt limit shock. And I think it’s extraordinarily important that Congress and the Administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills, and that we avoid any kind of event like 2011, which had, at least for a time, a noticeable adverse effect on confidence and on the economy.

Question (Annalyn Kurtz, CNN): Annalyn Kurtz, with CNNMoney. This week marks five years since the financial crisis began, and Hank Paulson, who you’ve worked very closely with, has said his biggest regret was that he wasn’t able to convince the American people that what was done— the bank bailouts—weren’t for Wall Street, they were for Main Street. What is your biggest regret as you reflect on the five-year anniversary? And do you believe that the Fed, Congress, and the President have put the necessary measures in place to prevent another deep financial crisis?
Answer: Well, on regrets, as Frank Sinatra says, I have many. I think my—you know, reasonably, the biggest regret I have is that we didn’t forestall the crisis. I think once the crisis got going, it was extremely hard to prevent. You know, I think we did what we could, given the powers that we had, and I would agree with Hank that we were motivated entirely by the interest of the broader public, that our goal was to stabilize the financial system so that it would not bring the economy down, so that it would not create massive unemployment and economic hardship that was even more—that would have been even more severe by many times than what we actually saw. So I agree with him on that. And I guess, since you gave me the opportunity, I would mention that, of course, all the money that was used in those operations has been paid back with interest. And so, it hasn’t been costly, even from a fiscal point of view. Now, in terms of progress, that’s a good question. I think we’ve made a lot of progress. We had, of course, the Dodd–Frank law passed in 2010, and then we recently, you know, have come to agreement internationally on a number of measures, including Basel III and other agreements relating to the shadow banking system and other aspects of the financial system. I think that our—today, our large financial firms, for example, are better capitalized by far than they were certainly during the crisis and even before the crisis. Supervision is tougher. We do stress testing to make sure that firms can withstand not only normal shocks, but very, very large shocks, similar to those they experienced in 2008. And, very importantly, of course, we now have a tool that we didn’t have in 2008—which would have made, I think, a significant difference if we had had it—which is the orderly liquidation authority that the Dodd–Frank bill gave to the FDIC in collaboration with the Fed. Under the orderly liquidation authority, the FDIC, with other agencies, has the ability to wind down a failing financial firm in a way that minimizes the direct impact on the financial markets and on the economy. Now, I should say, I don’t want to overstate the case—I think there’s a lot more work to be done. In the case of resolution regimes, for example, the United States has set the course internationally. Other countries and international bodies like the FSB are setting up standards for resolution regimes, which are very similar to those of the United States, which is going to make for better cooperation across borders. But we’re still some distance from being fully geared up to work with foreign counterparts to successfully wind down an international—multinational financial firm. And that’s—we’ve made progress in that direction, but we need to do more, I think. So, I think there’s more to be done. There’s more to be done on derivatives, although a lot has been done to make them more transparent and to make the trading of derivatives safer. But it’s going to be probably some time before, you know, all of this stuff that has been undertaken, all of these measures are fully implemented. And we can assess, you know, the ultimate impact on the financial system.