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

Question (Pedro Da Costa, Reuters): Thanks, Mr. Chairman. Pedro da Costa from Reuters. You cite meaningful progress on the labor market both on the unemployment front and in terms of payroll growth. But much of the decline in the unemployment rate has been due, as you know, to the decline in participation. So my question to you is—and also on the payroll front, some people would argue that, while there has been growth, it hasn’t been strong enough to keep up with population growth and make up the gap that we have from the recession. So, how high do you think the jobless rate would be if it were not for the decline in participation? I’ve heard estimates as high as 10 to 11 percent. And could you put the labor market in that context?
Answer: Certainly. So, I think there is a cyclical component to participation, and, in that respect, the unemployment rate understates the amount of sort of true unemployment, if you will, in the economy. But on the other hand, there is also a downward trend in participation in our economy, which is arising from factors that have been going on for some time, including an aging population, lower participation by prime-age males, fewer women in the labor force—other factors which aren’t really related to this recession. Over the last year, the unemployment rate has dropped by eight-tenths of a percentage point. The participation rate has dropped by three-tenths of a percentage point, which is pretty close to the trend. So, in other words, I think it would be fair to say that most of the improvement in the unemployment rate—not all, but most of it in the last year—is due to job creation rather than lower participation. I would also note that if you look at the broader measures of unemployment that the BLS publishes, including part-time work, including discouraged workers and so on, you’ll see that those rates have fallen about the same amount as the overall standard civilian unemployment rate. So I think that there has been progress, and it’s obscured to some extent by the downward trend in participation. But I also would agree with you that the unemployment rate, while perhaps the best single indicator of the state of labor market, is not by itself a fully representative indicator.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. To what extent do you regard yourself as responsible for the tightening in financial conditions that you noted? Was it a mistake to talk about tapering in the way that you did in June and do you stand by your guidance that it will be appropriate? Do you still expect that it will be appropriate to dial down asset purchases by the end of this year?
Answer: So to answer the first part of your question, I think there’s no alternative in making monetary policy but to communicate as clearly as possible, and that’s what we tried to do. As of June, we had made meaningful progress in labor market conditions, and the Committee thought that was the time to begin talking about how the eventual wind-down of the program would take place and how it would be tied to the evolution of economic variables. And, in particular, I talked about a proposed strategy that would take about a year for the total wind-down to take place and which, in turn, was also fully contingent on the ratification—so to speak—of our outlook, which included continued improvements in the labor market. So all of that was very consistent with what we said when we began the program, that our goal was to achieve a substantial improvement in the outlook for the labor market, and we needed to communicate how that was going to be put into practice. Failing to communicate that information would have risked creating a large divergence between market expectations, public expectations, and what the Committee intentions were, and that could have led to much more serious problems down the road. So I think the communication was very important. The general framework—to answer the other part of your question, the general framework in which we’re operating is still the same. We have a three-part baseline projection, which involves increasing growth that’s picking up over time as fiscal drag is reduced, continuing gains in the labor market, and inflation moving back towards objective. We are looking to see—in the coming meetings, we’ll be looking to see if the data confirm that basic outlook. If it does, we’ll take a first step at some point—possibly later this year—and then continue so long as the data are consistent with that continued progress. And so that basic structure is still in place. But what I want to emphasize is really two things. First, as I’ve said, asset purchases are not on a preset course, they are conditional on the data. They’ve always been conditional on the data. And, secondly, that even as we move from asset purchases to rate policy as the principal tool of monetary policy, it’s our intent to maintain a highly accommodative policy and to provide the support necessary for our economy to recover and to provide jobs for our citizens.

Question (Jon Hilsenrath, Wall Street Journal): Jon Hilsenrath from the Wall Street Journal. Just to follow up on Binya’s question, Mr. Chairman, you said that you could pull back the purchases possibly later this year. You sound a little bit less certain that it’s going to happen later this year. So I’d like you—to ask you to talk a little bit more about your conviction about whether these are like—the pullback is likely to start this year, where do you stand on that? And I also don’t think I heard you mentioned that 7 percent unemployment number that you’ve talked—you talked about back in June. That was the rate that was—the unemployment rate that was supposed to prevail when the Fed was done doing this. Is that no longer operative?
Answer: So there is no fixed calendar—schedule, I really have to emphasize that. If the data confirm our basic outlook, if we gain more confidence in that outlook and we believe that the three-part test that I mentioned is indeed coming to pass, then we could move later this year, we could begin later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy. So we are tied to the data—we don’t have a fixed calendar schedule—but we do have the same basic framework that I described in June. The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market. Last time, I gave 7 percent as an indicative number to give you some sense of, you know, where that might be. But, as my first answer suggested, the unemployment rate is not necessarily a great measure, in all circumstances, of the state of the labor market overall. For example, just last month, the decline in the unemployment rate came about more than entirely because of declining participation, not because of increased jobs. So what we will be looking at is the overall labor market situation, including the unemployment rate, but including other factors as well. But, in particular, there is not any magic number that we are shooting for. We’re looking for overall improvement in the labor market.

Question (Ylan Mui, Washington Post): Ylan Mui, Washington Post. You mentioned that tighter fiscal conditions are a concern for the Committee as you guys think about whether or not it’s appropriate to reduce asset purchases. What do you all expect to be able to do in the future, when you actually do begin to pull back in your asset purchases, to manage expectations and manage the market reactions such that we don’t see another increase in rates?
Answer: Oh, tighter financial conditions, sure. Well, I think part of the reaction we’ve seen—and it comes from a number of sources—part of it comes from improved economic news and that’s part of the reason why rates have gone up in other countries as well as in the United States. And that—to the extent that tighter financial conditions reflect a better outlook, that’s a good thing, and that’s not a problem at all. Part of it reflects views about monetary policy, and that we want to make sure we get straight. And that’s why—to answer the earlier question, again, it’s why communication is so important. We need to explain, as best we can, how we’re going to move and on what basis we’re going to move. It’s much more difficult today than it was 20 years ago because the tools are more complex so they’re less familiar, but that’s still very important. I think the other factor which was at play was an unwinding of excessively risky and levered positions in the markets, and insufficiencies of liquidity in some cases meant that those unwindings led to larger reactions in prices and rates than might otherwise have occurred. Now, the tightening associated with that is, to some extent, unwelcome, but, on the other hand, to the extent that some of the riskier, more levered positions have been eliminated, I think that makes the situation more sustainable and reduces, at least, the risk that there will be an over-strong reaction to further announcements. So we will do our best to communicate clearly. That is our goal and our objective. The more clearly we communicate, the better the chance that markets will understand our intentions and that we can avoid any sharp movements. But, again, we’re dealing with tools that are less familiar, harder to quantify, and harder to communicate about than the traditional funds rate.

Question (Robin Harding, Financial Times): Robin Harding, from the Financial Times. Mr. Chairman, the median Committee member expects a 2 percent interest rate at the end of 2016, and, in the long run, they expect interest rates to return to 4 percent. Can you give us any sense of when you and when the Committee expect interest rates to get back to that 4 percent figure?
Answer: Let me first restate the—I think the key point here, which is that the large majority of the participants of the FOMC, including voting and nonvoting members who are asked to describe their own assessment of optimal policy—the large majority of them estimate that the appropriate target for the federal funds rate at the end of 2016 will be around 2 percent, even though at that time the economy should be close to full employment, according to our best projections. The reason for that—there may be possibly several reasons, but we did discuss this in the Committee today—the primary reason for that low value is that we expect that a number of factors—including the slow recovery of the housing sector, continued fiscal drag, perhaps continued effects from the financial crisis—may still prove to be headwinds to the recovery. And even though we can achieve full employment, doing so will be done by using rates lower than, sort of, the long-run normal. So, in other words, in economics terms, the equilibrium rate, the rate that achieves full employment, looks like it will be lower for a time because of these headwinds that will be slowing aggregate demand growth. So that’s why we expect to see growth that—I mean, rates at an unusually low level. I imagine it would take a few more years after that to get to the 4 percent level. I couldn’t be much more precise than that—I mean, we’re already obviously stretching the bounds of credibility to talk about specific projections to 2016. But I think you would expect to see that rates would gradually rise for the two or three years after 2016 and ultimately get to 4 percent.

Question (Greg Ip, The Economist): Greg Ip of the Economist. You said that you—the Committee would be unlikely to raise the federal funds rate if inflation remains below target, but your own projections have inflation—that’s the midpoint of your inflation projections—below your 2 percent target through 2016. So is that inconsistent with the liftoff in the federal funds rate in that period? And, related, is there a case to be made that your thresholds should be supplemented with a lower bound for the inflation rate—i.e., you won’t tighten if inflation is at or below some lower bound?
Answer: So on the latter part, you know, of course, you’re seeing interest rate projections and inflation projections separately. You’re not seeing them combined by individuals. Each individual is making their own projection. I think you’re right, I mean, that we should be very reluctant to raise rates if inflation remains persistently below target, and that’s one of the reasons that I think we can be very patient in raising the federal funds rate since we have not seen any inflation pressure. On having an inflation floor, that would be in addition to the guidance. We are discussing how we might clarify the guidance on the federal funds rate. That is certainly one possibility. I guess an interesting question there is whether we need additional guidance on that, given that we do have a target. And, of course, implicit in our policy strategy is trying to reach that target for inflation, but that—an inflation floor is certainly something that, you know, could be a sensible modification or addition to the guidance.

Question (Victoria McGrane, Dow Jones Newswires): Victoria McGrane, Dow Jones Newswires. Many investors were expecting the Fed to move at least a little bit in pulling back the bond-buying program today. Given that you all decided not to do that, are—do you have any concerns that, once again, the Fed is confusing investors and sending mixed signals?
Answer: Well, I don’t recall stating that we would do any particular thing in this meeting. What we are going to do is the right thing for the economy. And our assessment of the data since June is that, taken collectively, that it didn’t quite meet the standard of satisfying our—or of ratifying or confirming our basic outlook for, again, increasing growth, improving labor markets, and inflation moving back towards target. We try our best to communicate to markets—we’ll continue to do that—but we can’t let market expectations dictate our policy actions. Our policy actions have to be determined by our best assessment of what’s needed for the economy.

Question (Greg Robb, MarketWatch): Thank you, Mr. Chairman. Greg Robb, MarketWatch. Was there a discussion among the Committee today about changing the forward guidance, the 6.5 percent jobless rate? And could you say why the Committee decided to hold that steady in light of the weaker economy?
Answer: Well, as I mentioned earlier, the Committee has regularly reviewed the forward guidance, and there are a number of ways in which the forward guidance could be strengthened. For example, Mr. Ip mentioned an inflation floor. There are other steps that we could take. We could provide more information about what happens after we get to 6.5 percent and those sorts of things, and to the extent that we could provide precise guidance, I think that would be desirable. Now, it’s very important that we not take any of these steps lightly, that we make sure we understand all the implications, and that we are comfortable that it will be—that any modifications of the guidance will be credible to markets and to the public. So, we continue to think about options. There are a number of options that we have talked about. But today, we—as of today, we didn’t choose to make any changes to the guidance.

Question (Don Lee, Los Angeles Times): Don Lee, L.A. Times. As you may know, the Census Bureau reported yesterday that the poverty rate and the median household income saw no improvement last year. And I wonder, when you see median incomes turning up significantly for most people, and in light of the fact that people in the middle and the bottom have seen very little of the gains relative to higher income households, how would you assess the—both quantitative easing and Fed policies?
Answer: Sure. So that’s certainly the case that there are too many people in poverty. There are a lot of complex issues involved. There are complex measurement issues, I would just have to mention that. There are a lot of issues that are really long-term issues as well. For example, it might seem a puzzle that the U.S. economy gets richer and richer, and yet there are more poor people. And the explanation, of course, is that our economy is becoming more unequal. The more very rich people and more people in the lower half who are not doing well, these are— there’s a lot of reasons behind this trend, which has been going on for decades, and economists disagree about the relative importance of things like technology and international trade and unionization and other factors that have contributed to that. But I guess my first point is that these long-run trends—it’s important to address these trends, but the Federal Reserve doesn’t really have the tools to address these long-run distributional trends. They can only be addressed really by Congress and by the Administration. And it’s up to them, I think, to take those steps. The Federal Reserve is—we are doing our part to help the median family, the median American, because one of our principal goals—we have two principal goals, one is maximum employment, jobs. The best way to help families is to create employment opportunities. We’re still not satisfied, obviously, with where the labor market, the job market is. We’ll continue to try to provide support for that. And then the other goal is price stability, low inflation, which, of course, also helps make the economy work better for people in the middle and the lower parts of the distribution. So we use the tools that we have. It would be better to have a mix of tools at work—not just monetary policy, but fiscal policy and other policies as well. But the Federal Reserve, we can—you know, we only have a certain set of tools, and those are the ones that we use. Again, our objective—our objectives of creating jobs and maintaining price stability, I think, are quite consistent with helping the average American, but there’s limits to what we can do about long- run trends, and I think those are very important issues that Congress and the Administration, you know, need to look at and decide, you know, what needs to be done there.

Question (Jeremy Tordjman, Agence France-Presse): Hi, Jeremy Tordjman, with AFP. Some emerging countries are blaming the Fed policies for the financial distress that they are experiencing. I wanted to have your take on that. And also, how did you judge the way the markets reacted to your tapering announcement back in June? Thank you very much.
Answer: Well, let me just talk about—I talked a little bit about the communication in June. Let me talk just about the emerging markets, which I think is an important issue. Let me just first say that we have a lot of economists who spend all of their time looking at international aspects of monetary policy, and we spend a lot of time looking at emerging markets. I spend a lot of time talking to my colleagues in emerging markets. So we’re watching that very carefully. The United States is part of a globally integrated economic and financial system, and problems in emerging markets—or in any country, for that matter—can affect the United States as well. And so, again, we are watching those developments very carefully. It is true that changes in longer-term interest rates in the United States—but also in other advanced economies—does have some effect on emerging markets, particularly those who are trying to peg their exchange rate, and can lead to some capital inflows or outflows. But there are also other factors that affect inflows and outflows. Those include changes in risk preference by investors, changes in growth expectations, different perceptions of institutional strength within emerging markets across different countries. So there are a lot of factors that are there playing a role, and that’s one reason why different emerging markets have had different experiences. They have different institutional structures and different policies. But, just to come to the bottom line here, we think it’s very important that emerging markets grow and are prosperous. We pay close attention to what’s happening in those countries—it affects the United States. The main point, I guess, I would end with, though, is that what we’re trying to do with our monetary policy here is, I think, my colleagues in the emerging markets recognize, is trying to create a stronger U.S. economy. And a stronger U.S. economy is one of the most important things that could happen to help the economies of emerging markets. And, again, I think my colleagues in many of the emerging markets appreciate that—notwithstanding some of the effects that they may have felt—that efforts to strengthen the U.S. economy and other advanced economies in Europe and elsewhere ultimately redounds to the benefit of the global economy, including emerging markets as well. Thank you.