Federal Reserve press conference, 2011-11-02 — Chair Ben Bernanke

Question (Steve Liesman, CNBC): Mr. Chairman, over the past several months, it seems there’s been increasing criticism of the Fed’s policy. You received a letter on the eve of the September meeting urging you not to take action from the GOP leadership. Several GOP presidential candidates have criticized Fed policy in the debates. On the first issue, do you feel that crossed the line? Was it appropriate in terms of the concepts of the Fed’s independence? On the second question, what are the GOP presidential candidates not hearing or understanding about Fed policy, in your opinion?
Answer: Well, politics is politics, and the Federal Reserve tries to stay nonpartisan and out of those debates. I mean, our job is to do the best we can for the U.S. economy, to do what we can to promote our mandate of maximum employment and price stability, and although we must be accountable to the Congress over the longer term, in the short term, it’s very important that the Fed be free from political pressures. And therefore, we are going to make our decisions based on what’s good for the economy, and we’re not going to take any politics into account. Now, the concerns that have been expressed relate to the possibility that the Fed’s highly expansionary policies might be contributing to inflation risk. I would simply point to the record. If you look back for the last five years, inflation—although it’s been volatile because of commodity price fluctuations—has averaged about 2 percent, which is close to a reasonable definition of price stability, whereas the area where we have fallen short, obviously, is on the unemployment side. So I think that criticisms based on the concern about inflation have so far, at least, not proved to be very valid.

Question (Binyamin Appelbaum, New York Times): Has the Fed discussed the idea of nominal GDP targeting? And what are your views on the advantages and disadvantages of that approach?
Answer: So the Fed’s mandate is, of course, a dual mandate. We have a mandate for both employment and for price stability, and we have a framework in place that allows us to communicate and to think about the two sides of that mandate. We talked today—or yesterday, actually—about nominal GDP as an indicator, as an information variable, as something to add to the list of variables that we think about, and it was a very interesting discussion. However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy. So we are not contemplating at this date—at this time—any radical change in framework. We are going to stay within the dual- mandate approach that we’ve been using until this point.

Question (Greg Robb, MarketWatch): Thank you, Mr. Chairman. Greg Robb, MarketWatch.com. At the moment now, banks are holding hundreds of billions of dollars in excess reserves, and at the same time, corporations seem to be holding lots of cash on the—and foreigners—at the same time, foreigners keep investing a lot of money in the United States. The current account deficit is very large. Could you shed some light on that situation? Is there something that foreigners know that U.S. companies don’t about investing in the U.S.?
Answer: Well, most of the—a great deal of the investment in the U.S. takes the form of purchases of U.S. government debt in Treasury securities. And that, in turn, reflects the desire for the liquidity and safety provided by the U.S. Treasury market. For example, as you know, two of the largest holders of U.S. Treasury securities are China and Japan, who hold those securities primarily as foreign exchange reserves and, in the case of China, in an effort to keep their exchange rate from appreciating too quickly. So, I was—while it’s good that foreign central banks and so on have the confidence to buy U.S. Treasuries, it’s not quite the same as investing in plant and equipment. We’ve seen a little bit of improvement there, but it’s still obviously too low to be consistent with a full employment economy.

Question (Peter Barnes, Fox Business): Peter Barnes, Fox Business. Sir, could you comment on the failure of MF Global, which is a primary dealer? And specifically, the Financial Times is reporting that the leverage ratio at MF Global was 40 to 1. Were you aware of that? Did the Fed approve of that? Is that an acceptable leverage ratio, particularly since the financial crisis?
Answer: Certainly. The New York Federal Reserve Bank approved MF Global to be a primary dealer; I believe it was in February of this year. At that time, the company met the criteria that had been set forth in terms of management, financial condition, capacity, and so on to qualify to be a primary dealer. We have set those standards in a way that would allow smaller firms like MF Global to participate in the primary dealer market. But I would like to emphasize, I guess, a couple of points. First, we are not the regulators of MF Global. That’s done by the SEC and the CFTC, so we do not have ongoing insight into developments within the company. And secondly, again, making them a primary dealer did not in any way constitute a seal of approval. In fact, the New York Fed’s website contains a statement pretty much to that effect. So, they were a primary dealer, we stopped trading with them before they failed, and we’ve suffered no losses or other consequences from our transactions with the company. Again, in terms of your question about leverage and financial condition, the company declined very, very quickly based on, apparently, a small number of large bets. As far as I know we were not aware of that, but again, to emphasize, we were not— we are not the overseers, the regulators of that company.

Question (Jon Hilsenrath, Wall Street Journal): To follow up on that question, should the Fed be, on an ongoing basis, monitoring its primary dealers?
Answer: The question is, Should the Fed be monitoring its primary dealers? Only if the Fed is the supervisor. In this case, the combination of a broker–dealer and a futures commission merchant imply that the SEC and the CFTC are the appropriate supervisors. They would not have qualified—this company would not have qualified as a SIFI under the provisional guidance issued by the FSOC, so there’s no basis at this point for the Fed to be the overseer of that, of those companies.

Question (Neil Irwin, Washington Post): Neil Irwin with the Washington Post. Mr. Chairman, this is the third straight set of economic projections you’ve released that have downgraded forecasts for growth and for employment. I wonder, is there some systematic error, some blind spot that’s behind these, kind of, overly optimistic forecasts? What are you doing internally to understand what you got wrong the last few projections?
Answer: Well, it’s a perfectly fair question. And, you know, we spend a lot of time reviewing those errors. The staff, in particular, presents us with information on forecast errors and on revisions, et cetera, and so we look at that very carefully. I think it’s clear that—in retrospect, that the severity of the financial crisis and a number of other problems, including the dysfunction of the housing market, have been more severe and more persistent than we initially believed, and that, together with a number of other phenomena like deleveraging by the household sector and so on, has slowed the pace of recovery. So, yes, we have again downgraded the medium-term forecast. Evidently, the forces—you know, the drags on the recovery were stronger than we thought. I would add, however, though, that although I think it’s very important to look at the fundamental factors affecting the recovery, there’ve been some elements of bad luck. For example, this year, the combination of the natural disaster in Japan which had global impacts in terms of growth, oil price increases, the European debt crisis, which was not anticipated to be as severe and create as much volatility as it has in financial markets—all those things have been negatives for growth, and they do explain at least part of the downward revision.

Question (Michael McKee, Bloomberg): Michael McKee with Bloomberg Television. Many Americans wonder what the Fed has actually accomplished with its monetary policy actions since about QE2. Fed officials like to talk about the effect they’ve had on interest rates, but the economy seems insensitive to interest rates these days. Can you explain what you have managed to accomplish? Can you tell us whether you feel your mandate requires you to do anything you can think of on an ongoing basis until some targets are met? And can you explain to the average American why you’re doing what you’re doing? And do you think that you risk credibility if the average American doesn’t see some sort of improvement in the economy?
Answer: No, it’s a fair question. I would first say that monetary policy is having effects on the economy. And we’ve talked about the effects on asset prices, but we have continued to analyze the effects of changes in interest rates, for example, on decisions like investment or car purchases. One area where monetary policy has been blunted—the effects have been blunted—has been the mortgage market, where very tight credit standards have prevented many people from purchasing or refinancing their homes, and therefore the low mortgage rates that we’ve achieved have not been as effective as we had hoped. So, monetary policy may be somewhat less powerful in the current context than it has been in the past, but nevertheless, it is affecting economic growth and job creation. If you ask about the accomplishments, I would first of all mention a very important one, which is that we have kept inflation close to 2 percent, on average, which both has avoided the problems of high inflation but also very importantly has avoided the risk of deflation. And we’ve seen in other countries, in other contexts, that deflation can be a very pernicious problem and very difficult to get out of once you are there. So we have been able to achieve, on average, stable prices. With respect to growth, I think that our policies, including the cutting of rates to zero in December 2008 and the first round of asset purchases in the fall of ’08 and in the spring of ’09, were very important for helping to explain why the economy stopped contracting and began to grow again in the middle of 2009. I think there’s a lot of evidence that that did promote growth and job creation. I would argue that we’ve also been successful with some of the later actions that we’ve taken, although it’s early to say for things like the maturity extension program, but we always face the problem of asking the question, Well, where would we be without these policies? And our best estimates are that—absent the support of monetary policy, that the economy would be in a much deeper ditch and that unemployment would be much higher than it is. That being said, you know, again, people rightly recognize that we have not yet gotten the economy back to where we want it to be, and their dissatisfaction is perfectly understandable. Yes, I do think that with—you know, that we do need to do whatever we can to move the economy towards price stability and maximum employment. We’ll continue to do that so long as the tools that we have are efficacious and that they don’t have costs or risks or negative side effects that are worse than the benefits. We’ll always be making that evaluation.

Question (Joshua Zumbrun, Bloomberg): Josh Zumbrun from Bloomberg. Your colleague Daniel Tarullo phrased this as, “Further action would be required in the absence of favorable developments.” Does that mean that, looking at the forecast tables we have here today, that if we don’t see improvement from what’s in those tables, that further action would be required?
Answer: Again, I can’t speak for my colleagues on the Committee. I will say that that forecast we have is satisfactory in one dimension, in the sense that inflation remains low and stable, but it is very unsatisfactory in terms of the rate of growth of the economy, the rate at which unemployment comes down. So I think the judgment we’re going to have to make is, do the tools we have—are those tools likely to be sufficiently effective? Or do they bear costs and risks that would make them less effective or not worth using? So it’s a judgment we’re going to have to continue to make. We’re going to have to continue to evaluate the outlook. But again, I really can’t speak for my colleagues until we have looked at the entire array of data and made a decision about that.

Question (Luca Di Leo, Dow Jones Newswires): Luca DiLeo with Dow Jones. Mr. Chairman, you’ve partly addressed this, but there’s something I still fail to understand. Given that your forecast is still so gloomy for employment through 2014, given that you’re not worried about inflation, and given that you said that MBS is a viable option, why not act today?
Answer: So, as you point out, our forecast is not a very satisfactory one in the sense that unemployment is very high and growth is very slow. We have taken a lot of actions. Let me be very clear that the Federal Reserve’s monetary policy is highly accommodative now—we brought rates close to zero, we have done $2 trillion worth of asset purchases, we have made commitments about rates, we’ve extended the maturity of our portfolio—so we have taken a lot of steps, including steps at the last two meetings, so we are being very aggressive in providing monetary accommodation. I was asked before about conditions for further accommodation. Well, we are prepared to do that, and we will continue to observe, you know, how the economy evolves. You know, what we have is a projection; there’s a lot of uncertainty there. And so it will be very important to see, you know, what actually happens in terms of financial market conditions and economic growth. So, but we are prepared to take further action. We’ve already taken quite a bit of action, but we’re prepared to do more, and we have the tools to do more if that’s appropriate. Again, while I do not shirk the responsibility of the Fed having to do what it can to meet its mandate, obviously, a broad range of policies can affect growth and employment, and I hope that there will be a range of actions that will complement and supplement the Federal Reserve’s efforts.

Question (Michelle Fleury, BBC): Michelle Fleury, BBC News. You mentioned, obviously, that Europe and what’s happening there has an impact here on the U.S. economy. To what degree can the Fed do little more than react to events abroad?
Answer: Well, it is a bit frustrating. Obviously, the key decisionmakers in Europe are the European leaders and economic policymakers there, and ultimately it’s their responsibility to find solutions to this very difficult problem. Of course, I and the Treasury Secretary and other economic policymakers in United States do confer and meet with European policymakers on a regular basis, and we give our advice, for what it’s worth—sometimes they take it, sometimes they don’t. But, obviously, they’re the ones who have to make those decisions. So what we can do, really, is only a couple of things. One is that we can look at our own financial institutions and try to assess the exposures and the linkages between our institutions and those in Europe and the sovereign debt in Europe, and we’ve been doing that on a consistent basis. We’ve looked also, of course, with other regulators at money market mutual funds and other types of financial institutions that have connections to Europe. So that’s one thing that we can do. And the other thing that we can do is stand ready, if necessary, to provide whatever support the broader economy needs and the financial system needs, should things worsen. I mean, we are hopeful that the latest measures, vigorously implemented, will indeed ultimately reduce these stresses, but in the case that things do get worse, both monetary policy and our policies of lender of last resort are available to insulate the U.S. economy from the effects.

Question (Katherine Lewis, Bankrate): Hi, Katherine Lewis for Bankrate.com. Can you talk about what impact you’ve seen from Operation Twist on longer-term CD rates and investment-grade bond yields? And do you have any message for people who are relying on those kinds of instruments for income?
Answer: Sure. It’s a little bit early to fully assess the effects of what we call the maturity extension program. But it does seem to be having, at least in a preliminary sense—it does seem to be having the intended effect of lowering longer-term interest rates and twisting the yield curve, as was anticipated. That, in turn, should lead to still lower mortgage rates and other interest rates which are relevant to the economy. We are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people. They have costs for savers. We have complaints from banks that complain that their net interest margins are affected by low interest rates. Pension funds will be affected if low interest rates for a protracted period require them to make larger contributions. So we are aware of those concerns, and we take them very seriously. I think the response is, though, that there is a greater good here, which is the health and recovery of the U.S. economy, and for that purpose we’ve been keeping monetary policy conditions accommodative, trying to support the recovery, trying to support job creation. After all, savers are not going to get very good returns in an economy which is in a deep recession. I mean, ultimately, if you want to earn money on your investments, you have to invest in an economy which is growing. And so, we believe that our policy will ultimately benefit not just workers and firms and households in general, but will benefit savers as well, as the returns that they can earn on their investments will improve with the improvement in the economy.

Question (Braimoh Odion-Esene, MNI): Braimoh Odion-Esene, Market News International. You mentioned that the Fed has the tools and stands ready to use it. But given that in the statement it says that the Committee saw growth strengthened somewhat in the third quarter, is it fair to say that the FOMC is less aggressively considering more policy accommodation, given the improvement they saw in the third quarter?
Answer: We did see some improvement in the third quarter, a modest improvement. We saw, for example, stronger consumption spending, a reasonable amount of capital investment, lower inventories, therefore suggesting more production in the fourth quarter, so it looks like the fourth quarter as well will be a moderate-growth quarter. So there was some improvement—some improvement, at least early in the period, in financial markets, although some of that has been reversed. So that was part of the situation that we were acknowledging in our statement, that’s true. But as has been noted, the medium-term outlook relative to our June projections has been downgraded, and the outlook remains unsatisfactory over the next few years. And we’ll continue to ask ourselves whether or not additional stimulus or additional actions can provide a better outcome, and that’s certainly something that remains on the table and we’ll continue to evaluate as we go forward. Thank you.