ben s bernanke : frequently asked questions speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the economic club of washington dc, washington dc, 7 december 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * it is a pleasure to speak once again before the economic club of washington. having faced the most serious financial crisis and the worst recession since the great depression, our economy has made important progress during the past year. although the economic stress faced by many families and businesses remains intense, with job openings scarce and credit still hard to come by, the financial system and the economy have moved back from the brink of collapse, economic growth has returned, and the signs of recovery have become more widespread. understandably, in a situation as complicated as this one, people have many questions about the current situation and the path forward. accordingly, taking inspiration from the ubiquitous frequently - asked - questions lists, or faqs, on internet websites, in my remarks today i ’ d like to address four important faqs about the economy and the federal reserve. they are : 1. where is the economy headed? 2. what has the federal reserve been doing to support the economy and the financial system? 3. will the federal reserve ’ s actions lead to higher inflation down the road? 4. how can we avoid a similar crisis in the future? where is the economy headed? first, to understand where the economy might be headed, we should take a look at where it has been recently. 1 a year ago, our economy – indeed, all of the world ’ s major economies – were reeling from the effects of a devastating financial crisis. policymakers here and abroad had undertaken an extraordinary series of actions aimed at stabilizing the financial system and cushioning the economic impact of the crisis. critically, these policy interventions succeeded in averting a global financial meltdown that could have plunged the world into a second great depression. but although a global economic cataclysm was avoided, the crisis nevertheless had widespread and severe economic consequences, including deep recessions in most of the world ’ s major economies. in the united states, the unemployment rate, which was as low as 4. 4 percent in march 2007, currently stands at 10 percent. recently we have seen some pickup in economic activity, reflecting, in part, the waning of some

number of factors support the view that the recovery will continue next year. importantly, financial conditions continue to improve : corporations are having relatively little difficulty raising funds in the bond and stock markets, stock prices and other asset values have recovered significantly from their lows, and a variety of indicators suggest that fears of systemic collapse have receded substantially. monetary and fiscal policies are supportive. and i have already mentioned what appear to be improving conditions in housing, consumer expenditure, business investment, and global economic activity. on the other hand, the economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate. despite the general improvement in financial conditions, credit remains tight for many borrowers, particularly bank - dependent borrowers such as households and small businesses. and the job market, though no longer contracting at the pace we saw in 2008 and earlier this year, remains weak. household spending is unlikely to grow rapidly when people remain worried about job security and have limited access to credit. inflation is affected by a number of crosscurrents. high rates of resource slack are contributing to a slowing in underlying wage and price trends, and longer - run inflation expectations are stable. commodities prices have risen lately, likely reflecting the pickup in global economic activity and the depreciation of the dollar. although we will continue to monitor inflation closely, on net it appears likely to remain subdued for some time. the three - month diffusion index for manufacturing – a measure of the breadth of production changes across industry categories – stood at 63. 8 percent in september. see board of governors of the federal reserve system ( 2009 ), statistical release g. 17, “ industrial production and capacity utilization ”, table 6 : diffusion indexes of industrial production ( november 17 ). what has the federal reserve been doing to support the economy and the financial system? the discussion of where the economy is headed brings us to our second question : what has the federal reserve been doing to support the economy and the financial system? the federal reserve has been, and still is, doing a great deal to foster financial stability and to spur recovery in jobs and economic activity. 3 notably, we began the process of easing monetary policy in september 2007, shortly after the crisis began. by mid - december 2008, our target rate was effectively as low as it could go – within a range of 0 to 1 / 4 percent, compared with 5 - 1 / 4 percent before the crisis – and we have maintained that very low rate for the past year.