ben s bernanke : the economic outlook and macroeconomic policy speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the national press club, washington dc, 3 february 2011. * * * good afternoon. i am pleased to be here at the national press club, and i ’ m especially glad for the opportunity to have a conversation with journalists who write about economic policy from our nation ’ s capital. your job is not easy, but it is essential. virtually every american is affected by developments in the economy and in economic policy. but contemporary economic issues can be highly complex, and few nonspecialists have the time or the background to master these issues on their own. the public must therefore rely on the diligent reporting, clear thinking, and lucid writing of reporters determined to go beyond dueling bumper stickers and sound bites to help people understand what they need to make good decisions, both in their personal finances and at the polls. these are weighty responsibilities, and the journalists i know take them very seriously. today, i will provide a brief update on the economy and how i expect it to evolve in the near term. then i will turn to the implications for monetary policy. finally, i will briefly discuss the daunting fiscal challenges that we face as a nation. the economic outlook the economic recovery that began in the middle of 2009 appears to have strengthened in recent months, although, to date, growth has not been fast enough to bring about a significant improvement in the job market. the early phase of the recovery, in the second half of 2009 and in early 2010, was largely attributable to the stabilization of the financial system, the effects of expansionary monetary and fiscal policies, and a strong boost to production from businesses rebuilding their depleted inventories. but economic growth slowed significantly last spring as the impetus from inventory building and fiscal stimulus diminished and as europe ’ s debt problems roiled global financial markets. more recently, however, we have seen increased evidence that a self - sustaining recovery in consumer and business spending may be taking hold. notably, we learned last week that households increased their spending in the fourth quarter, in real terms, at an annual rate of more than 4 percent. although a significant portion of this pickup reflected strong sales of motor vehicles, the recent gains in consumer spending look to have been reasonably broad based. businesses ’ investments in new equipment and software grew robustly over most of last

increasing only 1. 8 percent last year. these downward trends in wage and price inflation are not surprising, given the substantial slack in the economy. monetary policy in sum, although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that federal reserve policymakers have judged to be consistent over the longer term with our mandate from the congress to foster maximum employment and price stability. under such conditions, the federal reserve would typically ease monetary policy by reducing the target for its short - term policy interest rate, the federal funds rate. however, the target range for the funds rate has been near zero since december 2008, and the federal reserve has indicated that economic conditions are likely to warrant an exceptionally low target rate for an extended period. as a result, for the past two years we have been using alternative tools to provide additional monetary accommodation. in particular, over the past two years the federal reserve has further eased monetary conditions by purchasing longer - term securities on the open market. from december 2008 through march 2010, we purchased about $ 1. 7 trillion in longer - term treasury, agency, and agency mortgage - backed securities. in august 2010, we began reinvesting the proceeds from all securities that matured or were redeemed in longer - term treasury securities, so as to keep the size of our securities holdings roughly constant. around the same time, we began to signal to financial markets that we were considering providing additional monetary policy accommodation by conducting further asset purchases. and in early november, we announced a plan to purchase an additional $ 600 billion in longer - term treasury securities by the middle of this year. all these purchases are settled through the banking system, with the result that depository institutions now hold a very high level of reserve balances with the federal reserve. although large - scale purchases of longer - term securities are a different monetary policy tool than the more familiar approach of targeting the federal funds rate, the two types of policies affect the economy in similar ways. conventional monetary policy easing works by lowering market expectations for the future path of short - term interest rates, which, in turn, reduces the current level of longer - term interest rates and contributes to an easing in broader financial conditions. these changes, by reducing borrowing costs and raising asset prices, inflation data are derived using the price index for personal consumption expenditures. bis central bankers ’ speeches bolster household and business spending and thus increase economic activity. by comparison,