Federal Reserve press conference, 2012-04-25 — Chair Ben Bernanke

Question (Darren Gersh, Nightly Business Report): Thank you, Mr. Chairman. Darren Gersh, Nightly Business Report. Some of your critics—I’m sure you’re not going to be surprised—think that you’re still being too cautious, that unemployment is still high, the economy may be slowing, inflation is subdued, and I know you just talked about the balance sheet. But given that, is the Committee now any closer to QE3 than it was at its last meeting?
Answer: Well, first, the Committee has certainly been bold and aggressive in terms of easing monetary policy. We’ve maintained the federal funds rate close to zero since late 2008. We’ve had two rounds of so-called quantitative easing. We’ve had a maturity extension program, which is ongoing. We have offered guidance about the federal funds rate that goes into at least late 2014. So we have been very accommodative, and we remain prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target. So, in particular, we will continue to assess, you know, looking at the economic outlook, looking at the risks, whether or not unemployment is making sufficient progress towards its longer-run normal level, and whether inflation is remaining close to target. And, if appropriate, and depending also on assessment of the costs and risks of additional policy actions, we remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives. So those tools remain very much on the table, and we will not hesitate to use them should the economy require that additional support.

Question (Jon Hilsenrath, Wall Street Journal): Why did the lower bound in those forecasts rise?
Answer: The lower bound rose—again, this represents 17 distinct views—but I would guess that the reason is that the data have come in a little bit firmer, core inflation has been a little stronger than was expected. But those differences are not particularly large.

Question (Pedro Da Costa, Reuters): Mr. Chairman, Pedro da Costa from Reuters. So we know that the Committee foresees rates staying very low until late 2014. What is your personal view on the timing of the first rate hike, on the likely timing? And second, do you see the Committee as having an easing bias at the moment or is it neutral? Could it go either way?
Answer: Well, I’m very comfortable with the consensus view that we enunciated today, and I think that the Committee broadly is comfortable—a 9-to-1 vote in favor of this guidance. So again, that represents a very accommodative stance of policy. Our intention is to maintain a highly accommodative stance of policy for the foreseeable future, and we remain able and willing to take further action if necessary. At the same time, I think it is worth noting that the forward guidance on the federal funds rate is conditional on the data, and if the data were to come in much stronger than expected, we would adjust the guidance appropriately. So it’s not unconditional; it does depend on how the outlook evolves. And again, should the outlook strengthen notably, then we would have to respond to that.

Question (Steve Liesman, CNBC): Do you worry about creating confusion in the market between the guidance and the individual forecasts?
Answer: Well, again, the individual projections are inputs to the Committee decision, so the Committee decision is the critical element in that respect. We are continuing to work to become more transparent, and we have a variety of things that we’re looking at, so you’ll have to stay tuned for that. But again, the Committee was quite comfortable with the consensus that we have reported today.

Question (Kristina Peterson, Dow Jones Newswires): Thank you. Given your warnings to lawmakers about the looming fiscal cliff, do you think the Fed has to take into account when Congress chooses to take action? If they waited ’til January, say, would you feel obligated to take into the—the potential economic blow into account?
Answer: Well, I think we’ll have to take fiscal policy into account to some extent, but I think it’s very important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s, I think, absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy. So I—as I have said many times before, it’s imperative for Congress to give us a fiscal policy that achieves two principal objectives. The first is, of course, to achieve fiscal sustainability over the longer term; that is critical, and that’s something that needs to be addressed. At the same time, I think that can be done in a way that doesn’t endanger the short-term recovery of the economy. And I am concerned that if all the tax increases and spending cuts that are associated with the current law and which would take place—absent any congressional action—were to occur on January 1st, that that would be a significant risk to the recovery. So I’m looking and hoping that Congress will take actions that will address both sides of that—both requirements of a good fiscal policy.

Question (Joshua Zumbrun, Bloomberg): Mr. Chairman, Josh Zumbrun from Bloomberg News. In today’s statement you said, after coming quarters, you expect the economy “to pick up gradually.” Yet in the forecast that we got today, we see the forecast for 2013 and 2014, the growth forecast, is downgraded. What caused you to downgrade your forecast for 2013 and 2014 when you see a pickup after the coming quarters?
Answer: Well, again, these are the views of the participants, the 17 participants. So the basic feature that is described in our statement, which is that growth seems likely to pick up over time, is still obviously in our projections. The 2013 numbers are stronger than the 2012 numbers, and the 2014 numbers are stronger than the 2013 numbers. And the reason for that expected pickup over time is, first, a very accommodative monetary policy, which continues to provide support for the recovery. But in addition, some of the headwinds that have been affecting our recovery—such as the housing market, financial stresses, credit tightness, and so on—some of those things we hope will be lifting over time and will allow the economy to grow more quickly and approach more quickly its longer-run full employment level. The reason—I don’t know precisely why there’s been a slight downgrade in years further out, but I suspect that the fiscal issues may be part of that.

Question (Zachary Goldfarb, Washington Post): Mr. Chairman, you’ve made the inflation target sound a little bit more like an inflation ceiling, and you suggested that a breaching of that ceiling or target would hurt the Fed’s credibility. Can you explain a little bit more about why you think going 50 basis points or a full percentage point above the 2 percent target would hurt the Fed’s credibility, and what that would do on the unemployment side if you were to do that?
Answer: So it’s not a ceiling, it’s a symmetric objective, and we attempt to bring inflation close to 2 percent. And in particular, if inflation were to jump for whatever reason—and we don’t have, obviously don’t have perfect control of inflation—we’ll try to return inflation to 2 percent at a pace which takes into account the situation with respect to unemployment. The risk of higher inflation—you say 2½ percent; well, 2½ percent expected change might involve a distribution of outcomes, some of which might be much higher than 2½ percent. And the concern we have is that if inflation were to run well above 2 percent for a protracted period, that the credibility and the well-anchored inflation expectations, which are such a valuable asset of the Federal Reserve, might become eroded, in which case we would in fact have less rather than more flexibility to use accommodative monetary policy to achieve our employment goals. I would cite to you, just as an example, if you look at Vice Chair Yellen’s paper, which she gave—or speech, which she gave a couple of weeks ago, where she described a number of ways of looking at the late 2014 guidance. She showed there some so-called optimal policy rules that come from trying to get the best possible outcomes from our quantitative econometric models, and what you see, if you look at that, is that the best possible outcomes, assuming perfect certainty, assuming perfect foresight—very unrealistic assumptions—still involve inflation staying quite close to 2 percent. So there is no presumption even in our econometric models that you need inflation well above target in order to make progress on unemployment.

Question (Peter Barnes, Fox Business): Peter Barnes, Fox News, sir. For those of us who try to make a living out of parsing these statements noted that in the section on strains in global financial markets, the Committee said this time around, “Strains in global financial markets continue to pose significant downside risks to the economic outlook.” But in January, the Committee said that the strains were easing. What are we to read into this apparent change? Are strains tightening now? And what is your assessment of the situation in Europe with the debt crisis—are authorities there adequately addressing the debt crisis? Thank you.
Answer: Well, it’s just supposed to be a factual description of what’s happening in the environment. In January, the financial markets had calmed considerably, reflecting a number of steps taken in Europe, including, notably, the two large long-term refinancing operations by the European Central Bank, which helped finance Europe’s banks for up to three years. In recent weeks, we’ve seen more market stress arising from concerns about the fiscal positions of Spain and Italy, and, you know, we’ve seen more volatility in our own markets related to that. So we’re simply taking note of the fact that a portion of the improvement that we saw late last year and early this year in European financial markets and in our own financial markets has been reversed recently, nothing more intended than that. As you know, I had the opportunity over the weekend to speak with many of my European and other international colleagues because we had the G–20 and the IMF meetings here in Washington, and so we had plenty of opportunities to discuss the European situation. I think it’s true that the Europeans have made substantial progress overall. I include not only the two LTRO operations, but also the Greek debt deal, the work on the fiscal compact, and recently the setting up of a larger financial firewall that could be used to avoid contagion should another country face serious financial distress. So progress has been made, but obviously, judging by market conditions, there’s still more work to be done, and we are counting on our European colleagues to continue to follow through their commitments and to put very strong effort into addressing what remain significant problems and concerns in Europe.

Question (Robin Harding, Financial Times): Robin Harding from the Financial Times. Mr. Chairman, two questions. First, to follow up on Steve’s point about the interest rate forecast earlier: There are now only four FOMC participants who forecast that rates will still be close to zero at the end of 2014. Given that you said the Committee is entirely happy with that language in the statement, what information can we then take from the forecasts when they change like that? The second point—sorry—if you were to decide you wanted to do more to support the economy at some point, could you run us through the set of feasible options to do that? Thank you.
Answer: Sure. Well, if you compare this set of forecasts with January, you’ll see that a few members have pulled in their expected date. But let me just reiterate that, once again, that these are just inputs into a decision process. They represent individual estimates, and, quite admittedly, as many of the participants said around the table, you know, these are uncertain from an individual point of view. And as we discussed the range of considerations, including the fact that we remain uncertain about how the economy is going to evolve, I’ve talked about, for example, the so-called Okun’s law puzzle about whether or not unemployment will continue fall quickly or whether it will begin to level out. Given those uncertainties, given the risks like the European situation or the fiscal cliff that we’ve just discussed here, that there was a quite reasonable case for maintaining the guidance at late 2014. And as I said, there was a great deal of comfort among the participants and the Committee members with maintaining this guidance.

Question (Greg Robb, MarketWatch): Thank you. Greg Robb, MarketWatch.com. Judging from some of the speeches lately from Fed officials, it looks like too-big-to-fail is—they view this as the next step where attention should be paid and work should be done. There’s even a proposal to have legislation to force bank divestitures. Could you talk about your views on these things? Thank you.
Answer: Yes. I believe that too-big-to-fail was an important cause, or at least a propagating mechanism, of the financial crisis. And I believe it’s absolutely incumbent upon us to do all we can to eliminate too-big-to-fail. And what I mean by that is, a situation where a failing firm is bailed out because its collapse would have such adverse circumstance—consequences for the rest of the financial system. So we are working to get rid of too-big-to-fail, and I think making some progress. First of all, we are very substantially increasing the supervisory and regulatory oversight of large financial institutions; that includes, for example, the Basel III rules that require higher capital for all banks but particularly for systemically important banks, more liquidity requirements, stress tests, a range of tougher supervisory requirements that are—many of them are embedded in the rule we put out on 165–166, that section of the Dodd–Frank Act. So the first thing we’re going to do is make sure that these large institutions are stronger, that it’s much harder for them to fail, and that they are watched much more carefully and more actively by the supervisors. The other part of eliminating too-big-to-fail, though, is that, in that circumstance where a large complex financial firm does come to the brink of failure, that it must be allowed to fail; it must be safe to fail. And in that respect, one of the principal tools that we’ve gotten from Dodd– Frank is a so-called orderly liquidation authority, which is the FDIC’s tool, and the Federal Reserve is working closely with the FDIC there. The idea is to apply the same kind of bank resolution tools that the FDIC has used for many years on domestic banks to large complex financial firms. Now, obviously, the complexity and the international aspects of these firms make that a much more challenging task, but I think we’re making progress there. We have put out rules about so-called living wills, which will require large financial firms to essentially plan out how they would be disassembled. And we’ve continued to talk with international colleagues about how we would cooperate if a multinational firm had to be put into receivership. And, indeed, part of the reason that there’s been some downgrade or potential downgrade for some U.S. financial institutions is the judgment of the ratings agencies that the so-called implicit government support that these institutions have is less than in the past. And so, I think, ultimately, what we’ll need to have is a situation where large firms are both making judgments about their size and complexity based only on the economic benefits and costs and not on too- big-to-fail considerations, and that if there is failure, that it can be done and achieved without highly adverse consequences for the financial system and the economy. And that’s our objective, and that’s the way, I think, to end too-big-to-fail.

Question (Catherine Hollander, National Journal): You’ve been working hard to improve communications with both markets and the general public. What’s your assessment of how both is done?
Answer: Well, I think that’s part of your job to say. I think we’re making progress. I think it was an important step to make clear what our inflation objective is— I thought that was important. And we put out a statement that described the overall policy approach of the Federal Reserve. We’ve taken a number of steps to improve communication, including these press conferences, of course. But also, by expanding our projections and by continued, you know, work doing press—doing,sorry, doing testimonies and speeches, and most recently as you know, I did some classes—I taught some classes at a local university. So we’re doing our best both—to achieve, really, two objectives. One is to help make the Fed a little bit more understandable to the average person, because many people don’t understand all the arcane aspects of the Federal Reserve and of monetary policy. And to be good voters and good citizens, they need to understand, you know, something about what the Fed does. And also, to communicate with markets so that markets can better appreciate, you know, what our monetary policy plans are in order so that interest rates and other asset prices can appropriately reflect those plans. I think the evidence on the latter point is that there is a better understanding of the Fed’s policies. And, you know, we’ve seen, for example, less volatility in interest rates related to greater certainty about what the Fed is likely to do. But I want to emphasize that this is an ongoing task, it’s a work in progress, and we’re going to continue to look for ways to make ourselves better understand—more understandable and more transparent to the public.

Question (Greg Ip, The Economist): “Exceptionally low”?
Answer: “Exceptionally low”; you know, one of the reasons that language in the statement is sometimes a little vaguer than you would like is because we are trying to get a consensus among 17 or at least 10 people, and different members or participants in the FOMC might have somewhat different views of what “exceptionally low” means. Personally, I think it means something close to where we are—where we are now.

Question (Donna Borak, American Banker): Chairman, Donna Borak with American Banker. To follow up on the too-big-to-fail question, there has been acute discussion in recent months about calling for breaking up the banks even louder than before, even including some Fed officials. And you just talked about the need to eliminate too-big-to-fail. Of course, Dodd–Frank—that’s the intent of it. My question is twofold: Do you agree? And is there an argument to be made for breaking up the banks? And is that something that the Fed should consider when weighing the importance of financial stability? And, sort of, to this earlier point that you made is, what in your view is the litmus test that will allow us to know that we can achieve ending too-big-to-fail through Dodd– Frank?
Answer: Well, there may be circumstances where a bank or financial institution is artificially large. And in that context, if it were posing a severe threat to financial stability, then I suppose that considering breaking it up would be something that regulators should look at. My own view, though, is that a more market-responsive way to address this problem is to eliminate the incentive to be too-big-to-fail. That is, to—through tougher supervisory oversight, through higher capital requirements, through greater liquidity requirements, through restrictions on interconnectedness, et cetera, take away the benefits or force firms to internalize the costs of being large and complex. And on the other side, as I was saying earlier, if we can safely unwind a failing firm, then we no longer have too-big-to-fail, obviously, and so I think that’s a very, very important objective. The test would be that the financial markets that lend to large firms base their bond spreads and what they’re willing to pay for the stock of those firms solely on the risk-taking and on the business model of those firms and not on the fact that there’s some anticipation of a government bailout. And so I think market indicators will help us see our progress towards ending too-big-to-fail.

Question (Steven Beckner, MNI): Steve Beckner of Market News International. Mr. Chairman, good to see you. There’s been some concern in markets about what will happen to bond yields at the expiration of Operation Twist on June 30th and some speculation on what the Fed might do— might need to do to keep downward pressure on yields. Is that a concern that you share? And do you and your colleagues feel the need not to disappoint these kinds of market expectations?
Answer: Well, to your last point, the purpose of monetary policy is to achieve our objectives of maximum employment and price stability, it’s not to disappoint or not disappoint investors. So we will take actions based on those economic objectives and not try to achieve certain market outcomes. There’s some disagreement, I think, about exactly how balance sheet actions by the Federal Reserve affect Treasury yields and other asset prices. The view that we have generally taken at the Fed, in which I think—for which I think the evidence is pretty good, is that it’s the quantity of securities held by the Fed at a given time rather than the new purchases—the flow of new purchases—which is the primary determinant of interest rates. And if that theory is correct, then at such time that our purchases come to an end, there should be relatively minimal effects on interest rates at that time. And that, in fact, has been our—generally our experience in previous episodes where we have launched a program and then allowed it to come to a natural end. Of course, we’ll continue to monitor the situation, and if we believe that financial conditions for whatever reason are inconsistent with our macroeconomic objectives, then we will act to fix that. But, again, our expectation is that, at whatever point that the purchases end, that financial markets being quite forward looking will have anticipated that, and that the effects ought to be moderate.

Question (Scott Spoerry, CNN): Scott Spoerry with CNNMoney, sir. I wanted to ask you about the labor force participation rate. It’s at the lowest level since the early ’80s. Can you talk about why people are dropping out of the job market, whether it’s a permanent structural problem, and what convinces you that things may change? If I could just a pop a second question to follow up on Steve and the bonds—your colleague Sheila Bair wrote this week that her—about her concern over being in a bond bubble. She said you should declare victory, and you should do something about puncturing that bubble before it gets too much out of control. Can you respond to that too?
Answer: On declaring victory, I think it’s a little premature to declare victory. I think that keeping interest rates low is still appropriate for our economy. As for the bond bubble, interest rates are low for a lot of reasons; they include monetary policy, of course, but they also include a weak economy, low inflation expectations, and safe-haven demands for U.S. Treasuries. So, of course, interest rates will rise at some point. We hope that they do because that would be an indication that the economy is recovering and strengthening. And I think it’s important for holders of long-term securities to manage their risks and pay attention to that. But all that being said, I think, again, that there are both good reasons to continue monetary ease and good reasons for interest rates to be low. The first part of your question was— Oh, participation, labor participation, yes. Actually, we had a very good discussion of that at the meeting because it is an important issue, trying to assess how much of the change in employment is structural, how much is cyclical, and so on. There is, in fact, a downward trend in labor participation in the United States. It comes from, first, the fact that we’re no longer getting increased participation from women; female participation has leveled out. And, secondly, because, as the society ages, and also for other reasons, male participation has been declining over time. So there is a downward trend that we have to take into account. The participants at the meeting, at least some of them, suggested, though, that a good bit of the decline in participation that we’ve seen in the last few years does represent cyclical factors. Much of it is young people, for example, who presumably are not out of the labor force indefinitely, but, given the weak job market, they are going to school or doing something else rather than working. So one possibility and one reason why the unemployment rate may not fall as quickly going forward is that as the economy strengthens, as the labor market strengthens, many of these folks are going to come back in the labor force looking for work, which I think would be a good thing. But we’ll just have to see. But I do think—I think I would agree with the argument that a significant part of the decline over and above the downward trend in the participation rate is reflecting cyclical factors and should reverse when the economy gets stronger.

Question (Don Lee, Los Angeles Times): Don Lee from the L.A. Times. Can you give us your assessment of the impact of the mild winter weather on job growth and what that might mean going forward? And related to that, I think you said last month that some of the recent job gains reflected a catch-up from outsize cuts right after the recession. I mean, given those two things, what kind of job growth can we expect?
Answer: Well, the weather issue just reflects how difficult it can be to make real-time assessments of the state of the economy. The weather has probably affected a number of things. It probably brought forward some of the hiring so that it made perhaps January and February artificially strong and March perhaps artificially a little bit weak. It probably affected construction, manufacturing. There’s a number of things that were probably affected to some extent by the unusually warm weather that we had this winter, and we’re doing our best to try to adjust for that. We’re also looking at some of the seasonality issues that have arisen because of the unusually large recession in 2008 and 2009. So, again, that makes the data harder to interpret. I advanced the hypothesis that the increase in employment we’ve seen in the last five, six months might to some extent be greater than we’d expect going forward because it represented a one-time catch-up, undoing the very sharp layoffs in 2008 and 2009. That’s only a hypothesis. We’ll have to see going forward. If it’s correct, then job gains will be somewhat less than the 250,000 a month that we’ve been seeing recently. But we don’t know yet, we don’t know yet. And I wouldn’t draw too much conclusion from the March report. I think, again, because of weather and other factors, we really can’t take a conclusive result from that. So, we’ll continue to be watching the labor market. That’s a very important consideration. If unemployment looks like it’s no longer making progress, that’ll be an important consideration in thinking about policy options.

Question (Don Lee, Los Angeles Times): What kind of job growth, on average, is consistent with the unemployment projections that you’ve made?
Answer: Well, we need something—estimates differ. We need fewer jobs monthly to keep unemployment consistent or stable than in the past—I suppose more like 100,000 a month for stability. I don’t have an exact answer, but broadly speaking, 150– 200,000 jobs or so. But that’s a very rough estimate, and, of course, individual participants may have different views. Again, that’s not a forecast, I’ve made a hypothesis, which would imply slower improvement in unemployment. But the possibility, of course, exists that this recovery will generate a virtuous circle with greater hiring, which in turn generates more consumer spending, and greater hiring, and so on. That remains to be seen, and, of course, which way that goes is going to be a very important determinant of our response.

Question (Peter Cook, Bloomberg): Mr. Chairman, Peter Cook with Bloomberg Television. Thank you for the time. First up, sir, on the projections—in your bid for transparency, for more openness here at the Fed, would you consider, in the future, you and your colleagues actually attaching your name to the projections here so that, again, markets, folks out in the—watching your actions get a better sense of exactly what you’re thinking in the future, what your colleagues are thinking? And separately, sir, as you consider where you are at this moment, all you’ve been through with the financial crisis, the recovery, what is it right now that most frustrates you about this recovery, that still confounds you most about this recovery, that confuses you most?
Answer: Well, those things are not all the same. On the former, our subcommittee, headed by Vice Chair Yellen, is looking at the SEP for ways to improve transparency, and we’re looking at everything. So, your particular suggestion is on the table, as are other ways to try to make this more useful. And, again, it’s a work in progress, as I said before. The most frustrating aspect, I guess, of the recovery has been that it’s—has been that it’s been quite slow. And as a result, here we are, almost three years from the beginning of the expansion, and the unemployment rate is still over 8 percent. So we’re looking and hoping that as the headwinds lift, as financial stresses ease, as housing improves, that we’ll begin to get more rapid improvement in the economy and in the labor market. But it has been a very long slog, and that, I think, would be the single most concerning thing. From a policy perspective, there are many issues, like the fiscal issues, for example. But within the province of the Federal Reserve, I think it would be the pace of improvement in the labor market. Thank you.