ben s bernanke : us monetary policy and international implications speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at a high - level seminar “ challenges of the global financial system : risks and governance under evolving globalization ”, sponsored by the bank of japan and the international monetary fund, tokyo, 14 october 2012. * * * thank you. it is a pleasure to be here. this morning i will first briefly review the u. s. and global economic outlook. i will then discuss the basic rationale underlying the federal reserve ’ s recent policy decisions and place these actions in an international context. u. s. and global outlook the u. s. economy has faced significant headwinds, and, although the economy has been expanding since mid - 2009, the pace of our recovery has been frustratingly slow. the headwinds include the effects of deleveraging by households, the still - weak u. s. housing market, tight credit conditions in some sectors, spillovers from the situation in europe, fiscal contraction at all levels of government, and concerns about the medium - term u. s. fiscal outlook. in this environment, households and businesses have been quite cautious in increasing spending. accordingly, the pace of economic growth has been insufficient to support significant improvement in the job market ; indeed, the unemployment rate, at 7. 8 percent, is well above what we judge to be its long - run normal level. with large and persistent margins of resource slack, u. s. inflation has generally been subdued despite periodic fluctuations in commodity prices. consumer price inflation is running somewhat below the federal reserve ’ s 2 percent longer - run objective, and survey - and market - based measures of longer - term inflation expectations have remained well anchored. the global economic outlook also presents many challenges, as you know. fiscal and financial strains have pushed europe back into recession. japan ’ s economy is recovering from last year ’ s tragic earthquake and tsunami, and it continues to struggle with deflation and persistent weak demand. and in the emerging market economies, the rapid snap - back from the global financial crisis has given way to slower growth in the face of weak export demand from the advanced economies. the soft tone of global activity is yet another headwind for the u. s. economy. looking ahead, economic projections of federal open market committee ( fomc ) participants prepared for the committee ’ s september meeting called for the economic recovery to proceed at a

at times, in fits and starts. thus, this level adjustment is being spread over an extended period. nevertheless, the suppression of cost growth and world inflation, at some point, will begin to abate and, with the completion of this level adjustment, gradually end. these global forces pressing inflation and interest rates lower may well persist for some time. nonetheless, it is the rate at which countries are integrated into the global economic system, not the extent of their integration, that governs the degree to which the rise in world unit labor costs will continue to be subdued. where the global economy is currently in this dynamic process remains open to question. but going forward, these trends will need to be monitored carefully by the world's central banks. * * * i want to conclude with a few remarks about the federal budget situation, which - - at least until hurricanes katrina and rita struck the gulf coast - - was showing signs of modest improvement. indeed, tax receipts have exhibited considerable strength of late, posting an increase of nearly 15 percent in fiscal 2005 as a result of sizable gains in individual and, even more, corporate income taxes. thus, although spending continued to rise rapidly last year, the deficit in the unified budget dropped to $ 319 billion, nearly $ 100 billion less than the figure for fiscal year 2004 and a much smaller figure than many had anticipated earlier in the year. lowering the deficit further in the near term, however, will be difficult in light of the need to pay for post - hurricane reconstruction and relief. but even apart from the hurricanes, our budget position is unlikely to improve substantially further until we restore constraints similar to the budget enforcement act of 1990, which were allowed to lapse in 2002. even so, the restoration of paygo and discretionary caps will not address the far more difficult choices that confront the congress as the baby - boom generation edges toward retirement. as i have testified on numerous occasions, current entitlement law may have already promised to this next generation of retirees more in real resources than our economy, with its predictably slowing rate of labor force growth, will be able to supply. so long as health - care costs continue to grow faster than the economy as a whole, as seems likely, federal spending on health and retirement programs would rise at a rate that risks placing the budget on an unsustainable trajectory. specifically, large deficits will result in rising interest rates and an evergrowing ratio of debt service to gdp. unless the situation is