Federal Reserve press conference, 2011-04-27 — Chair Ben Bernanke

Question (Unknown Reporter, nan): Mr. Chairman, given what you know about the pace of the economy now, what is your best guess for how soon the Fed needs to begin to withdraw its extraordinary stimulus for the economy? And could you also say what is your working definition of what “extended period” means from the purposes of the Fed statement?
Answer: Well, currently as the statement suggests, we are in a moderate recovery. We’ll be looking very carefully, first, to see if that recovery is, indeed, sustainable, as we believe it is. And we’ll also be looking very closely at the labor market. We’ve seen improvement in the labor market in the first quarter relative to the latter part of last year, but we’d like to see continued improvement—more job creation going forward. At the same time, we’re also looking very carefully at inflation, the other part of our mandate. As I’ve noted, inflation—headline inflation—is at least temporarily higher, being driven by gasoline prices and some other commodity prices. Our expectation is that—that inflation will come down towards a more normal level. But we’ll be watching that carefully and also watching inflation expectations, which—you know, which are important that they remain well anchored if we’re going to see inflation remain under good control. So to answer your question, I don’t know exactly how long it will be before a tightening process begins. It’s going to depend obviously on the outlook and on those criteria which I suggested. The “extended period” language is conditioned on exactly those same points: “Extended period” is conditioned on resource slack, on subdued inflation, and on stable inflation expectations. Once those conditions are violated, or are we moving away from those conditions, that will be the time that we need to begin to tighten. “Extended period” suggests that there would be a couple of meetings probably before—before action. But, unfortunately, the reason we use this vaguer terminology is that we don’t know with certainty how quickly response will be required, and, therefore, we will do our best to communicate changes in our view as—but that will depend entirely on how the economy evolves.

Question (Unknown Reporter, nan): Mr. Chairman, first, thanks for doing this. This is a tremendous development. There are critics who say that Fed policy has driven down the value of the dollar, and a lower value to the dollar reduces Americans’ standard of living. How do you respond to the criticism that, essentially, Fed policy has reduced Americans’ standard of living?
Answer: Thanks, Steve. First, I should start by saying that the Secretary of the Treasury, of course, is the spokesperson for U.S. policy on the dollar and Secretary Geithner had some words yesterday. Let me just add to what he said, first, by saying that the Federal Reserve believes that a strong and stable dollar is both in American interest and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. But over the medium term, where our policy is aimed, we’re doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability by maintaining the purchasing value of the dollar, keeping inflation low. That’s obviously good for the dollar. The second thing we’re trying to accomplish is to get a stronger recovery and to achieve maximum employment. And, again, a strong economy, growing, with attracting foreign capital, is going to be good for the dollar. So in our view, if we do what’s needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term.

Question (Unknown Reporter, nan): I’m sorry, Mr. Chairman, one can’t help but noticing that it’s been unsuccessful so far.
Answer: Well, the dollar—the dollar fluctuates. One factor, for example, that has caused fluctuations that have been quite extreme during the crisis has been the safe-haven effect. So, for example, during the height of the crisis in the fall of 2008, money flowed in to the Treasury market and drove up the value of the dollar quite substantially, reflecting the fact that U.S. capital markets are the deepest and most liquid in the world. And a lot of what you’ve seen over the last couple of years is just the unwinding of that as the economy has strengthened and as uncertainty has—has been reduced. But that’s indicative, I think, of the—of the high standing that the dollar still retains in the world. Again, ultimately, the best thing we can do to create strong fundamentals for the dollar in the medium term is to, first, keep inflation low, which maintains the buying power of the dollar, and, second, to create a strong economy.

Question (Scott Lanman, Bloomberg): Thank you. Scott Lanman from Bloomberg News. Mr. Chairman, you’ve stated several times this year that the recovery won’t be fully established until we see a sustained period of stronger job creation. First, has it become truly established yet? And, if not, what’s your definition of a sustained period, and what’s your definition of stronger job creation?
Answer: Well, as I mentioned, we’ve made a lot of progress. Last August when we began to talk about another round of securities purchases, growth was very moderate. And we were actually quite concerned that growth was not sufficient to continue to bring the unemployment rate down. Since then, we have seen a reasonable amount of payroll creation, job creation. And that picked up in the most recent few months, together with the decline in the unemployment rate from, you know, 10 percent down to the current rate of 8.8 percent. So the labor market is improving gradually, as we say in our statement. And we’d just like to make sure that that is sustainable, and the longer it goes on, the more confident we are. And, again, it is encouraging to see the improvement that we’ve seen in recent months. That being said, the pace of improvement is still quite slow, and we are digging ourselves out of a very, very deep hole. We are still something like 7 million-plus jobs below where we were before the crisis. And so, clearly, the fact that we’re moving in the right direction, even though that’s encouraging, doesn’t mean that the labor market is in good shape. Obviously, it’s not. And we’re going to have to, you know, continue to watch and hope that we will get stronger and increasingly strong job creation going forward.

Question (Robin Harding, Financial Times): Robin Harding from the Financial Times. Mr. Chairman, you say in your statement that longer-term inflation expectations have remained stable, but a number of measures of inflation expectations have risen in recent months. And it’s clear from your forecast that you expect headline inflation to run above core inflation for some period. Is there anything that the Federal Reserve can do to prevent the public from maybe incorrectly assuming that a period of higher inflation is on its way as a result? Thank you.
Answer: Well, again, the inflation expectations that we are concerned about are medium-term inflation expectations. So we’ve seen, for example, in the financial markets, in the indexed bond market, for example, or in surveys like the Michigan survey, we’ve seen near-term inflation expectations rise fairly significantly, which is reasonable given higher commodity prices, higher gas prices. But for the most part, although there’s been some movement here and there, for the most part, I think it’s fair to say that medium-term inflation expectations have not really moved very much, and they still indicate confidence that the Fed will ensure that inflation in the medium term will be close to what I’ve called the mandate-consistent level. What can we do? In the short run, we can communicate and try to make sure the public understands what our policy is attempting to do, to be clear what our objectives are and what steps we’re willing to take to meet those objectives. Ultimately, if—if inflation persists or if inflation expectations begin to move, then there’s no substitute for action. We would have—we would have to respond. I think—while it is very, very important for us to try to help the economy create jobs and to support the recovery, I think every central banker understands that keeping inflation low and stable is absolutely essential to a successful economy. And we will do what’s necessary to ensure that that happens.

Question (Unknown Reporter, nan): Mr. Chairman, what will be the impact on the economic recovery, job creation, and rates on mortgages and other loans when the Fed ends its $600 billion bond-buying program? And a quick follow-up is, Will the Fed continue—how long with the Fed continue to allow for reinvestments?
Answer: As I—as I’ve noted and as you’re all aware, we are—we are going to complete the program at the end of the second quarter, $600 billion. We are going to do that pretty much without tapering. We’re just going to let the purchases end. Our view is that—based on past experience and based on our analysis—is that the end of the program is unlikely to have significant effects on financial markets or on the economy, the reason being that, first—just a simple point that we hoped we have telegraphed today—we hope we have communicated what we’re planning to do. And the markets have well anticipated this step. And you would expect that policy steps which are well anticipated by the market would have relatively small effects because whatever effects you’re going to have would have already been capitalized in the financial markets. Secondly, we subscribe generally to what we call here the stock view of the effects of securities purchases, which—by which I mean that what matters primarily for interest rates, stock prices, and so on is not the pace of ongoing purchase, but rather the size of the portfolio that the Federal Reserve holds. And so, when we complete the program, as you noted, we are going to continue to reinvest maturing securities, both Treasuries and MBS, and so the amount of securities that we hold will remain approximately constant. Therefore, we shouldn’t expect any major effect of that. Put another way, the amount of ease, monetary policy easing, should essentially remain constant going forward from—from June. At some point, presumably early in our exit process, we will, I suspect, based on conversations we’ve been having around the FOMC table, it’s very likely that an early step would be to stop reinvesting all or part of the securities which are coming—which are maturing. But take note that that step, although a relatively modest step, does constitute a policy tightening because it would be lowering the size of our balance sheet and, therefore, would be expected to essentially tighten financial conditions. That being said, we therefore have to make that decision based on the outlook, based on our view of how sustainable the recovery is and what the condition—the situation is respect to inflation. So we will base that decision on the evolving outlook.

Question (Unknown Reporter, nan): Do you think it will be several months away?
Answer: It depends on the outlook. The Committee will have to make a judgment.

Question (Luca Di Leo, Dow Jones Newswires): I’m Luca Di Leo from Dow Jones. Mr. Chairman, what’s the right response if high oil prices persist? On the one hand, they push inflation higher. On the other, they can hurt the economy by hitting spending. In the current environment, what’s the best strategy?
Answer: Well, we’re going to continue to—to see what happens. Our anticipation is that oil prices will stabilize or tend to come down. If that happens or if at least oil prices don’t increase significantly further, then inflation will—will come down, and we’ll have—we’ll be close to our medium-term objectives. So, as we look at oil prices, you know, as you point out, we have to look at both sides of the situation. I do think that one of the key things that we’ll be looking at will be inflation expectations because, if medium-term inflation expectations remain well anchored and stable so that firms are not passing on—at least on an ongoing, sustained basis—these higher costs into broader prices, into creating a broader inflation in the economy, as long as inflation expectations are well—are well stabilized, that won’t happen, then we’ll feel more comfortable just watching and waiting and seeing how things evolve. Again, if we fear that inflation expectations look like they’re becoming less anchored, we would have to respond to that.

Question (Darren Gersh, Nightly Business Report): Could I just follow up? So a lot of the long-term unemployment that we’re seeing now, do you think that’s out of the scope of what the Fed can do?
Answer: Well, indirectly, of course, if—to the extent that we can help the economy recover and help job creation proceed, then some of the people who get jobs will be those who’ve been out of work for a long time. That being said, we don’t have any tools for targeting long-term unemployment specifically. We just—can just try to make the labor market work better, broadly speaking.

Question (Peter Barnes, Fox Business): Peter Barnes, of Fox Business Network, Mr. Chairman. Last week, Standard & Poor’s put the United States’ debt on a negative watch for the very first time ever. What is your reaction to that? And are you concerned, are you worried that the United States is going to lose its triple-A credit rating?
Answer: Well, in one sense, S&P’s action didn’t really tell us anything because everybody who reads the newspaper knows that the United States has a very serious long-term fiscal problem. That being said, I’m hopeful that this event will provide at least one more incentive for Congress and the Administration to—to address this problem. I think it’s the most important economic problem, at least in the longer term, that the United States faces. We currently have a fiscal deficit which is simply not sustainable over the longer term. And if it’s not the addressed, it will have significant consequences for financial stability, for economic growth, and for our standard of living. It is encouraging that we are seeing efforts on both sides of the aisle to think about this issue from a long-run perspective. It’s not a problem that can be solved by making changes only for the next six months. It’s really a long-run issue. We’re still a long way from a solution, obviously. But it is, I think, of the highest importance that our political leaders address this very difficult problem as quickly and as effectively as they can. And to the extent that the S&P action goads a response, I think that’s—that’s constructive.

Question (John Berry, Fiscal Times): Mr. Chairman, John Berry. In the past, there have been times when fiscal policy has tightened, and the Federal Reserve has chosen to ease its policy in response partly to that, given whatever the circumstances in the economy were at the time. Congress appears intent at this point in cutting spending significantly; it might restrain the economy as it appears to be doing in Britain where they’re following a similar path. Is there anything the Fed can do or should do if, indeed, there are large budget cuts sometime in the next 18 months?
Answer: Well, first let me say that, addressing the fiscal deficit, particularly the long-run unsustainable deficit, is a top priority. And nothing I would want to say would be—should be construed as saying that I think it’s anything other than a top priority. It’s very, very important that our leaders address this—address this issue. I would also say that the cuts that have been made so far don’t seem to us to have very significant consequences for short- term economic activity. Now, my preference in terms of addressing the—the long-term deficit is to take a long-term perspective. It’s a long-term problem. If Congress and the Administration are able to make credible commitments to cutting programs or in any way changing the fiscal profile going forward over a long period of time, that is the most constructive way to address what is, in fact, a long-run problem. If the changes are focused entirely on the short run, then they might have some consequences for growth. And in that case, the Federal Reserve, which is, as always, going to try to set monetary policy to meet our mandate, would take those into account appropriately. But so far, I’ve not seen any fiscal changes that have really changed our near-term outlook.

Question (Toshi Ogata, Asahi Shimbun): Thank you, Mr. Chairman. I’m Toshi Ogata with the Asahi Shimbun, Japanese newspaper. I’d like to ask about uncertainties in the global economy or downside risks. In minutes from the March meeting, you—the Committee noted that the development in Japan increased uncertainties. So what’s the latest assessment on those risks or uncertainties such as tragedy in Japan or crisis in Europe and uprising in the Middle East? And what would be the impact of those on the U.S. economy and the world economy?
Answer: Well, one of the things that our projections include—you know, we’re only producing the forecast today—with our minutes in three weeks, we’ll include the full detailed projections as we normally do. One of the things that we include is the views of the participants on the amount of uncertainty there is in the forecast going forward. And I think I can say, without too much fear of giving away the secret, that FOMC participants do see quite a bit of uncertainty in the world going forward, and a lot of that uncertainty is coming from global factors. I’ve already talked about Middle Eastern–North Africa developments which have affected oil prices, conditions in emerging markets which have affected commodity prices and other things. The European situation continues, and we’re watching that very carefully. Now, obviously, you asked about Japan. Let me first say, you know, that I’ve had a lot of contact with my Japanese counterparts, central bank Governor Shirakawa and other people in the Japanese government. We collaborated with them on the foreign exchange intervention, as you know. And we are very admiring of the courage of the Japanese people in responding to these situations and of—the central bank of Japan has done, I think, a good job in providing liquidity and helping to stabilize financial markets in what are very, very significant disturbances to the economy. The implications for Japan have been discussed at some length, and I think Governor Shirakawa recently talked about them. In the near term, there will probably be a decline in Japanese output, reflecting the destruction, reflecting electricity problems, et cetera. We believe that will be relatively temporary and that the economy will start to come back. But, of course, this is a major blow, and it will take a lot of effort on the part of the Japanese people to restore the economy and to recover from the damage that was done by the—by the tragedy. For the United States, we are looking at this very carefully. Thus far, the main impact of the Japanese situation on the U.S. economy has been through supply chains. We’ve noted some automobile companies, for example, that have had difficulty getting certain components which are manufactured mostly or entirely in Japan. And that has led a number of companies to announce that they would restrain production for a time. So there may be some moderate effect on—on the U.S. economy. But we expect it to be moderate and to be temporary. Again, the most important issue here is—is the recovery of Japan, and our good wishes go out to the Japanese people and their efforts to overcome the adversity that they’re facing.

Question (Unknown Reporter, nan): Mr. Chairman, you have often stressed, as indeed you did again today, the importance of keeping inflation expectations low and stable to keep inflation itself under control. But irrespective of inflationary expectations or psychology, isn’t it possible that the Fed’s policies could be providing the monetary tinder for inflation the longer they continue?
Answer: Well, we—we view our monetary policies as being not that different from ordinary monetary policy. I mean, it’s true that we’ve used some different tools. But those tools are operating through financial conditions, and we have a lot of experience understanding how financial conditions—changes in interest rates, changes in stock prices, and so on—how they affect the economy, including both growth and inflation. So we are monitoring the state of the economy, watching the evolving outlook. And our intention, as is always the case, is to tighten policy at the appropriate time to ensure that inflation remains well controlled, that we meet that part of our mandate, while doing the best we can to ensure also that we have a stable economy and a sustainable recovery in the labor market. So the problem is the same one that central banks always face, which is choosing the appropriate path of tightening at the appropriate stage of the recovery. It’s difficult to get it exactly right, but we have a lot of experience in terms of what are the considerations and the economics that underlie those decisions. So we anticipate that we will tighten at the right time and that we will thereby allow the recovery to continue and allow the economy to return to a more normal configuration, at the same time keeping inflation low and stable.

Question (Hugues Honore, Agence France-Presse): Hughes Honore, Agence France-Presse. Many of the commercial partners of the United States are very concerned about the evolution of your foreign exchange rate. If in one hypothetical case the dollar would sink to a terrible level which would harm very much the U.S. economy and the prospect for the global economy because it affects the confidence of so many people, would you consider changing your monetary policy in accordance to that threat?
Answer: Well, as I said earlier, we do believe that a strong and stable dollar is in the interest of the United States and is in the interest of the global economy. Our view is that the best thing we can do for the dollar is, first, to keep the purchasing power of the dollar strong by keeping inflation low and by creating a stronger economy through—through policies which support the recovery and, therefore, cause more capital inflows to the United States. So those are the kinds of policies I think that in the medium term will create the conditions for an appropriate and healthy level of the dollar. So I don’t think I really want to address a hypothetical which I really don’t anticipate, because I think that the policies that we are undertaking, notwithstanding short-term fluctuations, will lead to a strong and stable dollar in the medium term.

Question (Unknown Reporter, nan): Mr. Chairman, Ken Rogoff and Carmen Reinhart wrote a book looking at 800 years of financial history and discovered that, when you have a financial crisis, it takes a lot longer for the economy to recover. Are people expecting too much from the Federal Reserve in terms of helping the economy recover? And has that complicated your monetary policymaking?
Answer: Well, let me just say, first, that Ken Rogoff was a graduate school classmate of mine, so I’ve known him for a long time. I’ve even played chess against him, which was a big mistake. And I enjoyed that book very much. I thought it was very informative. And as you say, it makes a point that, as an historical matter, that recoveries following financial crises tend to be relatively slow. Now, what the book didn’t really do, though, was given a full explanation of why that’s the case. Certainly, part of it has to do with the problems in credit markets, and my own research when I was in academia focused a great deal on the effects of problems in credit markets on recoveries. Other aspects would include the effects of credit problems on areas like housing and so on. And we’re seeing all that, of course, in our economy. But that said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate, that they—that the recapitalization of the banking system, the restoration of credit flows, and monetary and fiscal policies were not sufficient to get—to get as quick a recovery as might otherwise have been possible. And so, you know, we haven’t allowed that historical fact to dissuade us from doing all we can to support a strong recovery. That being said, it is a relatively slow recovery, and you can identify reasons for that. Credit factors are one. Another very important factor is that, you know, this was triggered by a bubble in the housing market, and the housing market remains very weak. And under normal circumstances, construction, both residential and nonresidential, would be a big part of the recovery process. And so there are a number of factors, and now we’re seeing high oil prices and other things. There are a number of factors which are holding—which are holding the recovery back. So there are good reasons for why the recovery is slower than we would like. At the same time, it’s very hard to blame the American public for being impatient. Conditions are far from where they—where we would like them to be. The combination of high unemployment, high gas prices, and high foreclosure rates is a terrible combination. A lot of people are having a very tough time. So I can certainly understand why people are impatient. And I guess the only thing I can say is that, while the recovery process looks likely to continue to be a relatively moderate one compared to the depth of the—of the recession, I do think that the pace will pick up over time. And I am very confident that, in the long run, that the U.S. will return to being the most productive—one of the fastest growing and dynamic economies in the world. And it hasn’t lost any of the basic characteristics that made it the preeminent economy in the world before the crisis, and I think we’ll return to that status as we recover. Thank you very much, and thank you for coming.