Federal Reserve press conference, 2011-06-22 — Chair Ben Bernanke

Question (Greg Ip, The Economist): Mr. Chairman, the Committee lowered not just this year’s central tendency forecast but also 2012. And yet, the statement of the Committee attributes most of the revision forecast to temporary factors. So I was wondering if you could explain what seems to be persisting in terms of holding the recovery back. I did see the statement says, “in part” to factors that are likely to be temporary. Are there more permanent factors that are producing a worse outlook than three months ago?
Answer: Well, as you—as you point out, what we say is that the temporary factors are “in part” the reason for the slowdown. In other words, part of the slowdown is temporary, and part of it may be longer lasting. We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace from—than we had anticipated in April. We don’t have a precise read on why this slower pace of growth is persisting. One way to think about it is that maybe some of the headwinds that have been concerning us, like, you know, weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues—some of these headwinds may be stronger or more persistent than we thought. And I think it’s an appropriate balance to attribute a slowdown partly to these identifiable temporary factors but to acknowledge a possibility that some of the slowdown is due to factors which are longer lived and which will be still operative by next year. You note that, in 2013, we have growth at about the same rate that we anticipated in April.

Question (Steve Liesman, CNBC): Mr. Chairman, could you describe to what extent the situation in Greece and Europe was discussed at the meeting and what policy conclusions were reached? And also could you tell us whether or not, in response to the recent slowdown, there was a discussion about further easing?
Answer: Well, with respect to Greece, that’s obviously very important. That—it’s a very difficult situation. We’ve been in close communication with our colleagues in Europe—obviously not part of the negotiations, but we’ve been kept well informed. We had a G-7 call over the weekend, for example. I think the Europeans appreciate the incredible importance of resolving the Greek situation. If there were a failure to resolve that situation, it would pose threats to the European financial system, the global financial system, and to European political unity, I would conjecture as well. So, yes, we did discuss it. It’s one of several potential financial risks that we’re facing now. But, again, we are mostly just following the—the situation closely and making sure that, as best we can, that our own institutions are well positioned relative to sovereign debt in the so-called peripheral countries. With respect to additional asset purchases, we haven’t taken any action, obviously, today. We’ll be reviewing the outlook going forward. It will be a Committee decision. I think the point I would make, though, in terms of where we are today versus where we were, say, in August of last year when I began to talk about asset purchases, is that at that time, inflation was very low and falling. Many objective indicators suggested that deflation was a nontrivial risk. And I think that the securities purchases have been very successful in eliminating deflation risk. I don’t think people appreciate necessarily that deflation can be a very pernicious situation where it could have very long-lasting effects on economic growth. In addition, growth in payrolls has actually picked up. In the four months before the Jackson Hole speech in August, there was about an 80,000 per month payroll increase. So far in 2011, including the weak payroll report in May, the average is closer to 180,000. So there has been improvement in the labor market, albeit not as strong as we would like. As of last August, we were essentially missing significantly in both—on both sides of our mandate. Inflation was too low and falling, and unemployment looked like it might be even beginning to rise again. In that case, the case for monetary action was pretty clear in my mind. I think we are in a different position today—certainly not where we’d like to be, but closer to the dual-mandate objectives than we were at that time. So, again, the situation is different today than last August, but we’ll continue to monitor the economy and act as needed.

Question (Luca Di Leo, Dow Jones Newswires): Luca DiLeo, Dow Jones. Would budget cuts, which may begin at the end of this year, help or hinder the economy? This goes back to the other question: What’s fiscal policy like in the 2012 growth forecast?
Answer: The effect of fiscal cuts on the economy depends very much on the timing. I’ve advocated that the negotiations about the budget focus on the longer term, say, 10 years, which is the budget window, or even longer if you’re taking into account entitlement reform, for example. By taking a long-run perspective, we can help the economy by reducing the risk that interest rates might rise suddenly. We may help increase confidence in the part of households and businesses. And so I think it’s very desirable that we take strong action to lower our budget deficits over the longer term. In doing that, I think it would be best not to—in light of the weakness of the recovery, it would be best not to have sudden and sharp fiscal consolidation in the very near term. That doesn’t do so much for the long-run budget situation. It just is a negative for growth. So my answer is that it depends very much on the timing, and I hope that the congressional negotiators will take a longer-term view as they—as they discuss the issue.

Question (Neil Irwin, Washington Post): Mr. Chairman, Neil Irwin with the Washington Post. Do you believe that the FOMC has the authority to set a, say, 2 percent inflation target on its own, unilaterally, or do you believe that it would need to go to Congress to get that target made more explicit? If the former, are you considering doing it? If the latter, are you considering going to Congress to ask them to do it?
Answer: Well, Neil, as you know, I’ve been a long-time proponent of an inflation target. I think that it would help anchor inflation expectations; it would make it easier to reach our inflation objective. At the same time, it’s not at all inconsistent with our employment objective because keeping inflation low and stable, keeping inflation expectations low and stable, actually gives the Fed more leeway to respond to short-term shocks to the economy. So I think it’s something, you know, that is worth considering. In terms of authorities, I would just say that there are multiple models around the world. So, for example, in the European Central Bank, that bank has a mandate for price stability, period. And they set their own definition of that using input from economists and others. So I don’t think there’s a real barrier to setting a target. However, it is very important that, first, that we communicate to the public what we’re doing. Without sufficient explanation and background, many people might think that we were somehow abandoning our employment target. So we need to make sure that that’s well understood both by the public and by Congress that having a target would not mean that we were abandoning the other leg of the dual mandate. Also, you asked about consulting with Congress. I think under any circumstances, it would be important to take the pulse of Congress. They—we might have the legal authority to do this, but I think we do need some buy-in from the Administration and Congress to take that step. We are continuing to periodically discuss this issue. It’s been part of our ongoing communications discussion, which included this press conference as one innovation, for example. There’s nothing imminent. But, again, we’ll continue to discuss this, and, as appropriate, we’ll be consulting about it.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. What is your assessment of the impact on the United States economy if there is a default by one or more European nations? What steps has the Fed taken to assess the consequences for American financial institutions? And, in particular, have you examined the impact on derivatives holdings outside of the regulated financial system?
Answer: Well, to answer your second question first, we have been very assiduous in examining the exposures of financial institutions to the so-called peripheral countries. The answer is that the banks that we regulate are not significantly exposed to—to those countries directly, at least. They have significant exposures to European banks in the nonperipheral countries, and so indirectly, they have that exposure. The—and that statement which I just made includes credit default swaps and so on. The gross numbers that the BIS publishes do not fully account for a wide variety of hedges and other positions. So we have asked the banks to essentially do stress tests and ask, looking at all their positions, all their hedges, What would the effect on their capital be if Greece defaulted? And the answer is that the effects are very small. It’s also the case that—well, we don’t oversee the money market mutual funds. We have been keeping a close eye on that situation. There again, the situation is similar in some sense, in that except—with very few exceptions, the money market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems. They do have very substantial exposure to European banks in the so-called core countries: Germany, France, et cetera. So to the extent that there is indirect impact on—on the core European banks, that does pose some concern to money market mutual funds and is a reason why the Federal Reserve and other regulators are continuing to look at ways to strengthen money market mutual funds. In terms of the impact of the problem in Greece on the United States, as I’ve indicated, the direct exposures are pretty small, and we’re doing all we can to monitor those exposures. However, as we saw in a small situation, a small case last spring, a disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices, and so on. And so, in that respect, I think the effects on the United States would be quite significant.

Question (Donna Borak, American Banker): Mr. Chairman, Donna Borak with American Banker. To talk about—further about banks, as you know, global regulators are meeting this week to finalize a proposal that would name the world’s most significantly banks and as well as a surcharge. There are some that are arguing that regulators are going too far, too fast. And I’m wondering, for regulators, you know, where is the line where you—to pass, where you go too far, and you do hurt credit lending and inevitably hurt the economy?
Answer: So I’ll be attending that meeting, and so I’ll have a chance to hear others’ views and to contribute to that discussion. It’s only been two years since we had the worst financial crisis certainly since the Great Depression and possibly in the history of the United States. And the failure or near failure of large financial institutions was a major contributor to that crisis. Since we can’t know exactly what threats will come in the future, probably the best all-purpose way of strengthening the balance sheets of banks and other financial institutions is by capital. And I’m very supportive of increased capital to—and better quality capital—to help ensure that these banks will be stable and able to lend in the event of another crisis, which I hope we don’t, of course, ever see. In terms of the SIFI surcharge, so-called, I think it’s also appropriate to have additional capital requirements for the largest and most systemically important institutions. After all, it’s because their failure would have very deleterious effects in the financial system, we need to take extra steps to make sure that they will be very unlikely to fail. In addition, it provides some more level playing field because, by having higher equity requirements, the largest institutions avoid some of the funding advantages that would otherwise accrue to firms that are viewed as being too big to fail. So I think it’s very important to do that. And we’ll be negotiating, discussing with our colleagues internationally what the appropriate number of firms is, what the appropriate criteria are, and what the amount of capital should be. In choosing the amount of capital, we will certainly be trying to weigh off and balance, on the one hand, the need for extra safety of systemically important firms against the impacts on lending and so on. Although I would note that, since systemically important firms are only part of the banking system, to the extent that they reduce their lending, some of that lending might go to other institutions. In terms of going too far, you know, it’s very, very difficult to make a broad-based assessment of the overall impact of all of the rules and regulations. But I would like to make clear that, both by law and by our internal practices, the Federal Reserve does cost-benefit analysis of every rule that we write, and we publish those. So we are looking at the cost-benefit for these regulations. Moreover, we have worked with—the Federal Reserve has worked actively with the BIS, the Basel Committee, to do analyses of the effects of capital requirements, on the one hand, on the probability of a crisis, and on the other hand, on the cost of lending and the effect on growth. Those studies have been published. And if you look at them, you’ll see that we believe that the capital which has been imposed so far would significantly reduce the threat of a massive financial crisis and, on the other hand, have very small effects on growth. So I don’t think we’re on the wrong side of that tradeoff at this point.

Question (Peter Barnes, Fox Business): Peter Barnes, Fox Business, Mr. Chairman. Mr. Chairman, what is the extended period right now for exceptionally low fed funds rate—rates, given the recent developments in the U.S. and global economic picture? Is it a year or two? And under what conditions would the extended period be extended even longer? Thank you.
Answer: Well, you know, the reason we use terms like “extended period” is not to be intentionally opaque. The reason is that we don’t know exactly how long. I think the—I think the thrust of “extended period” is that we believe we’re at least two or three meetings away from taking any further action, and I emphasize “at least.” But depending on how the economy evolves, and inflation and unemployment, it could be, you know, significantly longer. It will depend on how the economy and the economic outlook changes. If we do get both improved job creation and inflation close to our—close to or even above our mandate- consistent level, then that would be a sign that we need to consider beginning an exit process. But we’re not there at this point.

Question (Peter Barnes, Fox Business): But what about negative conditions—for example, the situation in Europe becoming a contagion situation?
Answer: Well, if the economy worsens and inflation remains relatively low, then we wouldn’t begin to exit, and, therefore, we wouldn’t change the language. The expected length of keeping rates low would then be longer, but, again, we wouldn’t want to give explicit—we could, I suppose, but we have at least not chosen so far to give an explicit time frame, again because it’s our intention to continue to monitor the economy, revise our outlook— we just revised our outlook fairly significantly since April—and make a judgment based on the incoming data. So we don’t want to commit ourselves necessarily to a fixed—a fixed time frame.

Question (Michelle Fleury, BBC): Michelle Fleury, BBC News. Looking at your unemployment projections, it seems you expect weak growth—weak jobs growth going forward and then a return to normal, sort of, in the long run. Does this mean, then, you don’t expect that there’s a structural issue here? And, if not, can you sort of give us a time frame for sort of in the long run, when we return to normal?
Answer: Well, we expect—as the projections show, we expect growth in the second half of this year and next year to be certainly faster than it’s been so far in 2011. And as a result, we would expect to see healthier job creation numbers. So we should see—if our forecast is correct, we’ll see payroll numbers improving relatively soon. In terms of the unemployment rate, though, given that growth is not much above the long-run potential rate of growth—and we have in our projections an estimate of 2.5 to 2.8 percent, we haven’t really done much better than that—it takes growth faster than potential to bring down unemployment. And since we’re not getting that, we project unemployment to come down very painfully slowly. At some point, if growth picks up as we anticipate, job numbers will start getting better. We’re still some years away from full employment in the sense of 5½ percent, say, and that’s, of course, very frustrating because it means that many people will be out of work for a very extended time. And that can have significant long-term consequences that concern me very much.

Question (Mark Felsenthal, Reuters): Mark Felsenthal, with Reuters. Mr. Chairman, given your response just now, and given the Fed’s belief that the recent uptick inflation is transitory, why wouldn’t the Fed consider taking more action to stimulate growth? And if it would consider that, would bond purchases be your preference, or would communications tactics, such as the one suggested by Jon, also be on the table as you consider how to get the economy growing again?
Answer: Well, there are a couple of considerations. One, as I indicated before, is that the current outlook is significantly different than what we were facing in—in August of last year. We no longer have a deflation risk. Inflation is above—at the moment, is above target. We expect it to fall, but we’re no longer—certainly not in any deflationary situation. And notwithstanding the disappointing news recently, the labor market has been performing better than it was last year. On top of that, we have an awful lot of uncertainty right now about how much of this slowdown is temporary, how much is permanent. So that would suggest, all else equal, that a little bit of time to see what’s going to happen is—it would be useful in making policy decisions. We’ll continue to look at the outlook and act, you know, as appropriately as the news comes in and the projections change. We do have a number of ways of acting; none of them are without risks or costs. We could, for example, do more securities purchases and structure them in different ways. We could cut the interest on excess reserves that we pay to banks. And as was suggested by an earlier question—several earlier questions, actually—Jon’s question about giving guidance on the balance sheet or by perhaps even giving a fixed date, you know, to define “extended period,” those are ways that we could ease further if needed. But, of course, all of these things are somewhat untested. They have their own costs. But we’d be prepared to take additional action, obviously, if conditions warranted.

Question (Akihiro Okada, Yomiuri Shimbun): Mr. Chairman, I am Akihiro Okada with Yomiuri Shimbun, a Japanese newspaper. During the Japanese lost decade in the 1990s, you strongly criticized Japan’s lack of policies. Recently Larry Summers suggested in his column that the U.S. is in the middle of its own lost decade. Based on those points with QE2 ending, what do you think of Japan’s experience and the reality facing the U.S.? Are there any historical lessons that we should be reminded about? Thank you.
Answer: Well, I’m a little bit more sympathetic to central bankers now than I was 10 years ago. I think it’s very important to understand that in my comments— both in my comment in the published comment a decade ago as well as in my speech in 2002 about deflation—my main point was that a determined central bank can always do something about deflation. After all, inflation is a monetary phenomenon, a central bank can always create money, and so on. I also argued—and I think it’s well understood that deflation, persistent deflation can be a very debilitating factor in—in growth and employment in an economy. So we acted on that advice here in the United States, as I just described, in August, September of last year. We could infer from, say, TIPS prices—inflation index bond prices—that investors saw something on the order of a one-third chance of outright deflation going forward. So there was a significant risk there. The securities purchases that we did were intended, in part, to end that risk of deflation. And I think it’s widely agreed that we succeeded in ending that deflation risk. I think also that our policies were constructive on the employment side. This, I realize, is a bit more controversial. But we did take actions as needed, even though we were at the zero lower bound of interest rates, to address deflation. So that was the thrust of my remarks 10 years ago. And we’ve been consistent with that—with that approach.

Question (Steven Beckner, MNI): Mr. Chairman, Steve Beckner, Market News International. Do you and your colleagues have a statistical trigger of any sorts, say, a particular level of unemployment or inflation at which you would begin the exit process? If you do, wouldn’t it make sense to announce it? If not, why not?
Answer: Well, it’s pretty impossible to create a statistical trigger because we have currently 17 independent members of the FOMC. Each has his or her own view on the outlook, on the efficacy of monetary policy, and on the risks to inflation and unemployment. So we don’t have any such formula. We have staff produce, you know, various scenarios, which give some indication of—given their projections of where the most likely outcomes, most likely points for a beginning of an exit would be. But as I said earlier when I was asked about my own projections, those are very tentative, depend on a lot happening, depend on the forecasts evolving as expected, and are certainly subject to change as new information comes in.