BERNANKE: Good afternoon.
It has been about three and a half years since the economic recovery began. The economy continues to expand at a moderate pace. Unfortunately, however, unemployment remains high. About 5 million people—more than 40 percent of the unemployed—have been without a job for six months or more, and millions more who say they would like full-time work have been able to find only part-time employment or have stopped looking entirely. The conditions now prevailing in the job market represent an enormous waste of human and economic potential. A return to broad-based prosperity will require sustained improvement in the job market, which in turn requires stronger economic growth. Meanwhile, apart from some temporary fluctuations that largely reflected swings in energy prices, inflation has remained tame and appears likely to run at or below the Federal Open Market Committee’s (FOMC’s) 2 percent objective in coming quarters and over the longer term.
Against a macroeconomic backdrop that includes both high unemployment and subdued inflation, the FOMC will maintain its highly accommodative policy. Today the Committee took several steps. First, it decided to continue its purchases of agency mortgage-backed securities (MBS), initiated at the September meeting, at a pace of $40 billion per month. Second, the Committee decided to purchase longer-term Treasury securities, initially at a pace of $45 billion per month, after its current program to extend the average maturity of its holdings is completed at the end of the year. In continuing its asset purchases, the Committee seeks to maintain downward pressure on longer-term interest rates and to keep financial conditions accommodative, thereby promoting hiring and economic growth while ensuring that inflation over time is close to our 2 percent objective. Finally, the Committee today also modified its guidance about future rate policy to provide more information to the public about how it anticipates it will react to evolving economic conditions. I will return to this change in our communication after discussing our decision to continue asset purchases.
Although the Committee’s announcement today specified the initial monthly pace and composition of asset purchases, it did not give specific dates at which the program may be modified or ended. Instead, the pattern of future asset purchases will depend on the Committee’s evaluation of incoming information, in two respects. First, we expect to continue asset purchases until we see a substantial improvement in the outlook for the labor market, in a context of price stability. In assessing the extent of progress, the Committee will be evaluating a range of labor market indicators, including the unemployment rate, payroll employment, hours worked, and labor force participation, among others. Because increases in demand and production are normally precursors to improvements in labor market conditions, we will also be looking carefully at the pace of economic activity more broadly.
Second, the Committee will be monitoring economic and financial developments to assess both the efficacy and possible drawbacks of its asset purchase program. The Federal Reserve’s asset purchases over the past few years have provided important support to the economy, for example, by helping to keep mortgage rates historically low. The Committee expects this policy tool to continue to be effective and the costs and risks to remain manageable, but as the program continues, we will be regularly updating those assessments. If future evidence suggests that the program’s effectiveness has declined, or if potential unintended side effects or risks become apparent as the balance sheet grows, we will modify the program as appropriate. More generally, the Committee intends to be flexible in varying the pace of securities purchases in response to information bearing on the outlook or on the perceived benefits and costs of the program.
Unlike the explicitly quantitative criteria associated with the Committee’s forward guidance about the federal funds rate, which I will discuss in a moment, the criteria the Committee will use to make decisions about the pace and extent of its asset purchase program are qualitative; in particular, continuation of asset purchases is tied to our seeing “substantial improvement in the outlook for the labor market.” Because we expect to learn more over time about the efficacy and potential costs of asset purchases in the current economic context, we believe that qualitative guidance is more appropriate at this time.
In today’s statement, the Committee also recast its forward guidance to clarify how it expects its target for the federal funds rate to depend on future economic developments. Specifically, the Committee anticipates that exceptionally low levels for the federal funds rate are likely to be warranted “at least as long as the unemployment rate remains above 61⁄2 percent, inflation over the period between one and two years ahead is projected to be no more than half a percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” This formulation is a change from earlier statements in which forward guidance about the federal funds rate was expressed in terms of a date; for example, in the statements following its September and October meetings, the Committee indicated that it anticipated that exceptionally low levels for the federal funds rate are likely to be warranted “at least through mid-2015.” The modified formulation makes more explicit the FOMC’s intention to maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability, a strategy that we believe will help support household and business confidence and spending. By tying future monetary policy more explicitly to economic conditions, this formulation of our policy guidance should also make monetary policy more transparent and predictable to the public.
The change in the form of the Committee’s forward guidance does not in itself imply any change in the Committee’s expectations about the likely future path of the federal funds rate since the October meeting. In particular, the Committee expects that the stated threshold for unemployment will not be reached before mid-2015 and projects that inflation will remain close to 2 percent over that period. Thus, given the Committee’s current outlook, the guidance introduced today is consistent with the Committee’s earlier statements that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Let me emphasize that the 61⁄2 percent threshold for the unemployment rate should not be interpreted as the Committee’s longer-term objective for unemployment. Indeed, in the economic projections submitted in conjunction with today’s meeting, the central tendency of participants’ estimates of the longer-run normal rate of unemployment is 5.2 to 6.0 percent. However, because changes in monetary policy affect the economy with a lag, the Committee believes that it likely will need to begin moving away from a highly accommodative policy stance before the economy reaches maximum employment. Waiting until maximum employment is achieved before beginning the process of removing policy accommodation could lead to an undesirable overshooting of potential output and compromise the FOMC’s longer-term inflation objective of 2 percent. As the FOMC statement makes clear, the Committee anticipates that policy under the new guidance will be fully consistent with continued progress against unemployment and with inflation remaining close to the Committee’s 2 percent objective over the longer term.
Although the modified guidance should provide greater clarity about how the Committee expects to respond to incoming data, it by no means puts monetary policy on autopilot. In this regard, let me make several points.
First, as the statement notes, the Committee views its current low-rate policy as likely to be appropriate at least until the specified thresholds are met. Reaching one of those thresholds, however, will not automatically trigger immediate reduction in policy accommodation. For example, if unemployment were to decline to slightly below 61⁄2 percent at a time when inflation and inflation expectations were subdued and were projected to remain so, the Committee might judge an immediate increase in its target for the federal funds rate to be inappropriate. Ultimately, in deciding when and how quickly to reduce policy accommodation, the Committee will follow a balanced approach in seeking to mitigate deviations of inflation from its longer-run 2 percent goal and deviations of employment from its estimated maximum level.
Second, the Committee recognizes that no single indicator provides a complete assessment of the state of the labor market and therefore will consider changes in the unemployment rate within the broader context of labor market conditions. For example, in evaluating a given decline in the unemployment rate, the Committee will also take into account the extent to which that decline was associated with increases in employment and hours worked, as opposed to (say) increases in the number of discouraged workers and falling labor participation. The Committee will also consider whether the improvement in the unemployment rate appears sustainable. Third, the Committee chose to express the inflation threshold in terms of projected inflation between one and two years ahead, rather than in terms of current inflation. The Committee took this approach to make clear that it intends to look through purely transitory fluctuations in inflation, such as those induced by short-term variations in the prices of internationally traded commodities, and to focus instead on the underlying inflation trend. In making its collective judgment about the underlying inflation trend, the Committee will consider a variety of indicators, including measures such as median, trimmed mean, and core inflation; the views of outside forecasters; and the predictions of econometric and statistical models of inflation. Also, the Committee will pay close attention to measures of inflation expectations to ensure that those expectations remain well anchored.
Finally, the Committee will continue to monitor a wide range of information on economic and financial developments to ensure that policy is conducted in a manner consistent with our dual mandate. It is worth noting that the goals of the FOMC’s asset purchases and of its federal funds rate guidance are somewhat different. The goal of the asset purchase program is to increase the near-term momentum of the economy by fostering more accommodative financial conditions, while the purpose of the rate guidance is to provide information about the future circumstances under which the Committee would contemplate reducing accommodation. I would emphasize that a decision by the Committee to end asset purchases, whenever that point is reached, would not be a turn to tighter policy. While in that circumstance the Committee would no longer be increasing policy accommodation, its policy stance would remain highly supportive of growth. Only at some later point would the Committee begin actually removing accommodation through rate increases. Moreover, as I have discussed today, the decisions to modify the asset purchase program and to undertake rate increases are tied to different criteria.
In conclusion, the FOMC’s actions today are part of our ongoing efforts to support economic recovery and job creation while maintaining price stability. As I have often stressed, however, monetary policy has its limits; only the private and public sectors working together can get the U.S. economy fully back on track. In particular, it will be critical that fiscal policymakers come together soon to achieve longer-term fiscal sustainability without adopting policies that could derail the ongoing recovery.
Thank you. I would be happy to answer your questions.
QUESTION: Mr. Chairman, Steve Lees from CNBC. Um. I guess I have a lot of questions. But I’ll just, um, offer up two here. Um, why are there different targets for QE and for the Federal Funds rate? What does that achieve? Um, secondly, what good is a target if you have to make reference to calendar dates in the statement itself, which is the thing you got away from? You had to point out in the statement that [given the forecast] it is not substantially different from the calendar dates you set out in October. Do you have to keep doing that from now on to make it a bit clear? And then just just thirdly—I know I said two
BERNANKE: I’m going to forget.
QUESTION: You have another paragraph after that that says um, ah, um, that it’s not just targeting something else so it’s not clear to me what good these targets are if you have to reference a calendar date and then kind of say in the next paragraph that it’s not really targets.
BERNANKE: First, as I said, the asset purchases and the rate commitments have different objectives. The asset purchases are about creating some near-term momentum in the economy: trying to strengthen growth and job creation in the near term. The increases in the Federal Funds rate, when they ultimately occur, are about reducing accommodation. These are very different objectives. Secondly, the asset purchases are a less well understood tool. We will be learning over time about how efficacious they are, about what costs they may carry with them in terms of unintended consequences they might create, and we will be seeing what else happens to the economy that can affect the level of, for example, unemployment that we hope to achieve. So for that reason, as I stressed in my opening remarks, we decided to make the criteria for asset purchases qualitative at this time because we have a number of different things we need to look at as we go forward. Rate increases, by contrast, are well understood. We understand the relationship between those and the state of the economy, so we have been able to give somewhat more specific quantitative guidance in that respect. With respect to the date, we wanted to make clear that the change in guidance does not change our mid-2015 expectations. Going forward, we will drop the date and rely on the [state-dependent] conditionality. That has a very important advantage, which is that if news comes in that the economy is stronger or weaker then financial markets and the public will be able to adjust their expectations for when policy tightening will occur without the committee having to go through a process of changing its date in a non-transparent way. That’s beneficial. Does that cover your questions?
QUESTION: Mr. Chairman, what prompted the committee to make the decision at this particular time to specify targets? And by taking an unemployment rate that is quite low compared to its current value does that shift the balance of priorities in terms of your dual mandate more in the direction of reducing unemployment rather than containing inflationary pressures?
BERNANKE: That is a very good question. We made the change today after a good bit of discussion. We had a very substantial discussion of the threshold approach at our last meeting. We felt that it was ready to go. We felt that it was ready to put out. While there are different views on aspects of the threshold approach, there was a lot of agreement that having a more explicit connection between rate policy and the state of the economy was more transparent and more helpful to the markets and to the public than our rate-based guidance has been. Therefore there was a general view that we should switch to that kind of guidance. We do hope it will be more helpful and give markets more information about how we are going to respond going forward. It is not a change in our relative weights on inflation and unemployment. By no means. First of all, with respect to inflation we remain completely committed to our 2%/year longer-run objective. Moreover, we expect our forecasts—you can see from the summary of economic projections—are that inflation will actually remain despite this threshold of 2.5% at or below 2%/year going forward. Finally, the thresholds we have put out are entirely consistent with our long view on what the path of interest rates has to be in order to achieve improvement in the labor market while keeping inflation close to targets. Both sides of the mandate are well-served here. There is no real change in policy. What this is instead is an attempt to clarify the relationship between policy and economic conditions.
QUESTION: Could I ask also given your economic projections are all the more important now that you have specified these targets is it difficult to put forward these projections now given the uncertainty over the “fiscal cliff” how sort of plastic are these?
BERNANKE: Are you talking about the SEP projections? Clearly, the fiscal cliff is having effects on the economy. Even though we’ve not yet even reached the point of the fiscal cliff potentially kicking in, it’s already affecting business investments and hiring decisions by creating uncertainty or creating pessimism. We saw what happened recently to consumer sentiment, which fell reasonably hard because of concerns about the fiscal cliff. So clearly, this is a major risk factor and a major source of uncertainty about the economy going forward. I would suspect, and although the participants don’t all make this explicit, but I would suspect what they are assuming in their projections is that the fiscal cliff gets resolved in some intermediate way whereby there’s still some fiscal drag but not as much as implied by the entire fiscal cliff. So I think that’s probably the underlying assumption that most people took when they made their projections. But you’re absolutely right. There’s a lot of uncertainty right now. And if the fiscal cliff situation turns out to be resolved in a way very different from our expectations, I’m sure you would see changes in the forecast.
QUESTION: Could you talk about the decision of whether to maintain the monthly bond purchases at $85 billion represents a ramping-up of or an additional easing of Fed policy, because you are now going to be adding a little bit more to the size of the balance sheet? And, also, you talk about maintaining the asset purchases until you see a substantial improvement in the outlook for the labor market, and you said that you wanted to take a qualitative approach, but you also have this 6.5% inflation [sic] threshold as well, so could you talk about what sort of evidence you would need to see to make you change the pace of or slow the bond purchases?
BERNANKE: The first part of your question was?
QUESTION: Is this an additional stimulus?
BERNANKE: No, this is a continuation of what we said in September. You will recall that in September we expressed dissatisfaction with progress in the labor market. At that point we began the $40 billion/month of MBS purchases and we said that unless we saw substantial improvement in the outlook for the labor market we would undertake additional purchases or other actions, and that is what we have done today. We have simply followed through what we said we would do last September. I do not think we have, relative to last month, significantly added to accommodation. The reason is that, at least in my view and I think in the view of many of my colleagues, what matters primarily is the mix of assets on the balance sheet. What is important is that we are acquiring Treasury securities and MBS, taking those out of the market, forcing investors into other related assets, and that is where the stimulus comes from—not so much in the size of the balance sheet per se. In my judgment the amount of stimulus is more or less the same. It is just being continued. It is a follow-through from what we saw in September. In terms of criteria, what we have done is that we have announced an initial amount of $85 billion/month in purchases. We are prepared to vary that as new information comes in. If the economy’s outlook gets noticeably stronger we would presumably begin to ramp-down the level of purchases. But, again, the problem with giving a specific number is that there are multiple criteria on which we make this decision. We will be looking at the outlook for the labor market, which is very important. We will also be looking at other factors that could be affecting the outlook for the economy, for example—I hope it won’t happen—if the fiscal cliff occurs, as I have said many times, I don’t think the Federal Reserve has the tools to offset that event, and in that case, we obviously have to temper our expectations about what we can accomplish. Likewise, as I said, we will also be looking at the efficacy and costs of our program and if we find that it is not working as well as we had hoped or if various costs are emerging that we had not anticipated then that would also have to be taken into account. We thought it was not constructive, because we ourselves are not sure what we would define as a substantial improvement, as long as costs and other considerations do not emerge, we are looking for something that is substantial, as far as a better job market.
QUESTION: Peter Cook at Bloomberg TV. Mr. Chairman, given the fiscal cliff, is it possible that if policymakers were to fail to agree to some sort of deficit deal by the end of this year that the size of these asset purchases could indeed grow? More specifically, you coined the phrase “fiscal cliff” and I wanted to get your take on whether you feel it is still the most appropriate language to describe what would happen at the beginning of the year. There are some Americans who may be alarmed by the language. There are some economists who see it as more of a slope. Do you still feel it is appropriate given the circumstances—the fiscal contraction that would come if there is no deal?
BERNANKE: Well, for the first part of your question, if the economy actually went over the cliff, our assessment, the CBO’s [Congressional Budget Office] assessment, and outside forecasters all think that that would have very significant adverse effect on the economy and on the unemployment rate. And so, on the margin, we would try to do what we could. We would perhaps increase a bit. But I just want to, again, be clear that we cannot – we cannot – offset the full impact of the fiscal cliff. It’s just too big given the tools that we have available and limitations on our policy tool kit at this point. In terms of the terminology, well – people have different preferences about what they want to call things. I think it’s a sensible term because I think the fiscal policies providing support to the economy – if fiscal policy becomes very contractionary, the economy I think will go off a cliff. I think it’s reasonable to be concerned about this. I don’t buy the idea that a short-term descent off the fiscal cliff would be not costly; I think it would be costly. And in fact, we’re already seeing costs. Why is it that consumer confidence dropped so sharply this week? Why is it that small business confidence dropped so sharply? Why are the markets volatile? Why is business investment among its weakest levels during the recovery? I think all of these things – at least to some extent – could be traced to the anticipation, the concern about the fiscal cliff. And I think that – you know – we don’t know exactly what would happen, but I think there’s certainly a risk that it could be serious. And therefore, I think it’s very important the most helpful thing I think Congress and the [Obama] administration can do right now is find a resolution that on the one hand achieves long-term fiscal sustainability which is critical – absolutely critical – for a healthy economy but also avoid derailing the recovery which is currently in process.
QUESTION: John Hilzenrath from the Wall Street Journal. Mr. Chairman, I want to try to square up some numbers. The threshold for when rate hikes might start is 6.5%. The committee’s assessment of the longer-run [average sustainable] unemployment rate is 6%. And the long-run equilibrium [nominal] Federal Funds rate is about 4%/year. That suggests that when the Federal Reserve does start raising interest rates down the road it might have to raise them fairly quickly to get to some equilibrium Federal Funds rate. Is that, specifically, the case? And, more generally, can you talk about what this framework you have set up today says about the exit strategy that you laid out some time ago. Is that evolving or changing?
BERNANKE: Well, that’s a good question. First of all, we do not have a precise estimate of the long-run sustainable unemployment rate. The estimates that were provided in the Summary of Economic Projections today, as is the case for a while, has been 5.2%-6.0%. It could be well less than 6.5%. That gives us some time. My anticipation is that the removal of accommodation after the takeoff, whenever that occurs, will be relatively gradual. I do not think we are looking at a rapid increase. Of course, that depends on what inflation is and other conditions, but the path that we are basing these numbers on is one that assumes, first of all, as you have anticipated, an increase in the Federal Funds rate first occurring sometime after the unemployment rate has fallen below 6.5%. But it does not necessarily assume a rapid increase after that. What we said in our statement was that we would take a balanced approach. In other words, once we get to that point we may or may not raise rates at that point. We will look at the situation. Assuming that inflation remains well-controlled, which I anticipate, I assume the rate of increase of the Federal Funds rate would be moderate. This is consistent with our statement today because the exit strategy was primarily about how we would normalize the balance sheet. At this time we have not made any changes about that. We believe that some increase in the size of our balance sheet is consistent with that general sequence that we laid out in the minutes a year and a half ago. That being said, if the balance sheet grows by enough we may have to reconsider the pace or timing of that, but I don’t see any changes that would radically change the time to normalization or the time to exit.
QUESTION: Thank you. Zack Goldfarb. I am going to continue the two question trend. First, on the fiscal cliff, it sounds like you are calling for a sensible balance between fiscal consolidation and support for the recovery. But if people in congress cannot do that in the next two weeks, do you think postponing all fiscal consolidation is preferable to going over the cliff? On the monetary policy actions today, can you give us a little more color on how you set the thresholds? What they were, what the alternatives were, and how you weighed similar policies?
BERNANKE: I’m hoping that Congress will do the right on the fiscal cliff. You know, there’s a problem with kicking the can down the road. It might avoid some of the short-term impacts on the recovery but it could create concerns about our longer term fiscal situation. I don’t want to see that. So I think it’s in the best interest of the economy to come to a 2-part solution, if you will. Part one is to modify fiscal policy in a way that doesn’t create enormous headwinds for the recovery in the near term. And part two is to at least take important steps towards achieving a framework at least – by which perhaps through further negotiation, the Congress and the [Obama] administration can achieve a sustainable path for fiscal policy. Both of these parts are very important. I don’t think that we can consider these negotiations a success unless both of them happen. I think they are equally important. On the threshold numbers, these numbers are based on substantial analysis done by staff both here and at the Reserve Banks trying to assess under optimal policy what would the interest rate path look like and how would it be connected or correlated with changes in unemployment and inflation. When we do that analysis, we find that the best interest rate path as best as we can determine it based on our models which are obviously imperfect has interest rates remaining low until inflation drops below 6.5%. We put in the half a percentage point above the 2%/year inflation goal as protection against any sort of concern about price stability, but we expect that inflation will not go there. We expect inflation to stay around 2.0%/year, which is consistent with our longer-term objective. If we get important new information about the structure of the economy, [changes] are possible, but I consider it unlikely. This is one of the advantages of this approach over the date-based approach: if information comes in that says that the economy is stronger or weaker than expected, that would require a change in the date-based approach but it does not require a change in the thresholds because that adjustment can be made by markets by simply looking at their own forecasts of when unemployment will cross the line and begin to put upward pressure on inflation.
QUESTION: Scott Spory from CNN, Sir. When you were appearing on 60 Minutes, you visited your own home town, and you talked a little bit about how the economy had affected the people you grew up with, the people down there. There are a lot of just regular people like that who are out in the countryside wondering what really happens to them if we do go over the fiscal cliff—taxes go up, spending goes down. Um. Do they need to look for a recession? Or are employers going to really cut back on employment, do you think? What do people out there really need to worry about and prepare for when it comes to really going over that fiscal cliff, if the folks in Washington cannot get their act together?
BERNANKE: Well, I come from a part of South Carolina which has been economically challenged for quite a long time. It remains so. Certain parts of South Carolina have developed pretty strongly. The part that I come from—mostly agricultural with a little manufacturing—has a very high unemployment rate, a high foreclosure rate, and people are having a very hard time there. I have visited there a few times since I became Chairman. Part of the reason that we are engaging in these policies is to try to create a stronger economy—more jobs—so that folks across the country, including folks in places like the one where I grew up, will have more opportunity to have a better life. That’s extremely important. And I think it is very important that we not just look at the numbers. It is easy to look at the unemployment rate and say that it is one-tenth or two-tenths—every tenth means many many people are represented there. It is very important to try to keep in mind the reality of unemployment and foreclosure and weak wage growth, et cetera. We always try to do that. It is always a delicate balance. You do not want to scare people. I actually believe that congress will come up with a solution. I certainly hope they will. But as many analysts, not just the Fed, have pointed out, if the fiscal cliff was allowed to occur, and certainly if it were sustained for any period, it could have a very negative effect on hiring and jobs, wages and economic activity, investment. Of course the consequences of that would be felt by everybody—certainly by those in areas like where I grew up that are relatively weak economically would feel the greater brunt. It is exceptionally urgent and important that congress and the administration come to a sensible agreement on this issue.
QUESTION: OK, Sir, I had a follow-up. I’m not going to ask you whether we are in a bond bubble. But obviously the new guidance that you have given in the FOMC statement is going to give a lot more clues to people who own bonds about when they might start lightening up their bond portfolios and changing their composition of what they own. Was concerns about information about bond prices and things happening in a big hurry in terms of some sort of a bubble popping, was that sort of a consideration in adding this transparency?
BERNANKE: I would not say it was an important motivation for adding transparency. I think transparency adds a lot of value. But it is a fact that this greater clarity will help markets better predict how bond yields will behave as we go forward in time. If the economy continues to strengthen as we hope, as the exit comes closer for the Federal Reserve, you would expect longer-term bond yields to begin to rise and the more information we can provide about the conditionality under which the Federal Reserve would remove accommodation the better they will be able to forecast and will allow for smoother adjustment. This is a positive aspect. I wouldn’t say it is the major reason. The major reason is to give the markets and the public more transparency about what is determining our policy. But that is one potential advantage.
QUESTION: Robin Harting, of the Financial Times. Mr. Chairman, you said a moment ago that these thresholds are based on an analysis of optimal policy. In the optimal policy path that Vice-Chair Yellen laid out in her speech of a few weeks ago, it showed the first rise in the Federal Funds rate occurring in early 2012, and then rates rising very slowly after that. Is that the policy that the Fed is now following? Secondly, if I may, you referred to a number of inflation forecasts in your introductory remarks. In that case, how will we ever know if the inflation threshold has been hit? Thank you.
BERNANKE: The kind of optimal policy path that Vice-Chair Yellen showed is indicative of the kinds of analysis that we have done. We have run it for a number of scenarios, different assumptions about models, and so on, but the general character of that interest rate path—i.e., that it stays low until unemployment is in the vicinity of 6.5%, or a little lower, and then rises relatively slowly—which goes back to the question that was asked earlier that it does not involve a rapid removal of accommodation after that point is reached. That is consistent with that kind of analysis, and that is the kind of analysis that was not the only thing we looked at but that was informative in our discussion. You will note also that in that kind of policy path of the type that she discussed that inflation stayed at 2 or very close to 2. In terms of inflation forecasts, what the committee will do is on a regular basis include in its statements where inflation is likely to be a year or so from now. For example, we currently say that inflation is likely to run at or below the committee’s objective in the longer term. The intellectual exercise we will be asking ourselves is if we maintain low interest rates along the lines suggested by this policy would we expect inflation to cross the threshold. Now, it is very important that the public, the media, the markets find our projections credible. For that reason, we will be referring extensively to publicly-available forecasts. Outside forecasts, the break-evens from inflation-protected bonds, etc. If our outlook deviates in any significant way from what all these things are saying, at a minimum it would be incumbent upon us to explain that. But my expectation is that our projections will be broadly consistent with public views, public information, and so I think we can manage the credibility issue. But again, to be clear, the projection that matters for our determination is the one that the committee collectively comes up with.
QUESTION: So you have articulated more clearly than ever your commitment to reduce unemployment, but you have also said that you are not doing anything more to achieve that goal. That you still expect it [the first increases in the Federal Funds rate] to be three years away, that you are still disappointed in the pace of progress, and that inflation is not the limiting factor. What is the limiting factor? Why is the Fed not announcing today additional measures to reduce unemployment? What would it take for you to do so?
BERNANKE: The question is whether this was something new relative to September. September was the date where we did do a substantial increase in accommodation. At that point we announced our dissatisfaction with the state of the labor market and the outlook for jobs, and said we would take further action if the outlook did not improve. What we have done today is following through what we said last September. I would say that, looking at it from the perspective of September, we have in fact taken significant additional action to provide support for the recovery and for job creation. One of the considerations, though, as I have talked about, is: given that we are now in the world of unconventional policy, it has both uncertain costs and uncertain efficacy or uncertain benefits. That creates a somewhat more complicated policy decision than the old style of just changing the Federal Funds rate. There are concerns that I have talked about in these briefings before that if the balance sheet gets indefinitely large there would be potential risks in terms of financial stability, in terms of market functioning, and the committee takes these risks very seriously. They impose a certain cost on policy that does not exist when you are dealing only with the Federal Funds rate. What we are trying to do here is balance the potential benefits in terms of lower unemployment and inflation at target against the reality that as the balance sheet gets bigger there are greater costs that might be associated with that and those have to be taken into account.
QUESTION: Given those actions it will still be three years until you achieve your goals. Is the message to be for the unemployed: we are basically doing all that we can? Is this the conclusion? That with that balance of factors, this is the most we can expect?
BERNANKE: Well, first of all these projections you are looking at are not a collective projection. There are nineteen participants making their own projections based on their own views of optimal policy. For example, it includes those folks who think we should not be doing any more purchases and their forecasts are included in there as well. It is not exactly an apples-to-apples comparison. It is true that if we could wave a magic wand and get unemployment down to 5% tomorrow we would do that. But there are constraints in terms of the dynamics of the economy, in terms of the power of these tools, and in terms of the fact that we do need to take into account the possibility of other costs and risks that might be associated with a large expansion of our balance sheet.
QUESTION: Just following up on that last question, how helpful would it be to see, as part of the fiscal cliff resolution, some near-term stimulus? The president has proposed that. I will ask my follow-up now: whatever happened to your southern accent?
BERNANKE: Well, on the second one I would like to think that I am bilingual. When I go home, sometimes it comes out pretty strongly. But I won’t try to do that here. I try to be careful, as you know, not to give views on specific tax and spending programs. Obviously, those are the province of the administration and congress. The attitude I have taken is that at a minimum congress should try to do no harm, that they should try to avoid policies that significantly slow or derail the recovery at this point. I think that is the critical thing, with the long-term objective of attaining a sustainable fiscal path. Now, given that basic recommendation, congress can consider variations. For example, if they believe they can achieve a strong, credible future path for fiscal policy that would potentially give them some room to do something a little more expansionary in the short term. But those are judgments that congress has to make, I think, about whether they can simultaneously continue to support the economy with fiscal policy in the short-term while maintaining the credibility that they will in fact be addressing our structural deficit problems in the longer term. That is really a question for them and for their staff.
QUESTION: Christina Peterson with Dow-Jones. Looking over the past year or several years, how would you evaluate the Fed’s accuracy in economic forecasts and how does that affect the ability to make monetary policy decisions—especially as it is connected to the thresholds?
BERNANKE: It is fair to say that we have overestimated the pace of growth—total output growth, GDP growth—from the beginning of the recovery, and so we have had to scale down our estimates of output growth. But interestingly, at the same time we have been more accurate—not perfectly accurate by any means, but more accurate—in forecasting unemployment. How do you reconcile those two things? I talked about this in remarks I gave at the New York Economic Club recently, right before Thanksgiving. I think the reconciliation is that what we are learning is that at least temporarily the financial crisis may have reduced somewhat the underlying potential growth rate of the U.S. economy. It has interfered with business creation, with investment, with technological advances, and so on. That can account for at least part of the somewhat slower growth. At the same time, of course, though, what monetary policy influences is not potential growth, not the underlying structural growth, that is for many other different kinds of policies. What monetary policy affects, primarily, is the state of the business cycle: the amount of excess unemployment or the extent of recession in the economy. There I think we have perhaps underestimated a bit the recession. But we have been much closer there. And therefore I think we have been able to address that somewhat more effectively with quite accommodative policy. That being said, we have, of course, over time, been disappointed in growth and job creation. We have, of course, obviously, as we did in September, added accommodation and we continue to reassess the outlook. I think it is fair to say that economic forecasting beyond a few quarters is very, very difficult and what we are basically trying to do is to create a plausible scenario that is reasonably likely and base policy on that, but be prepared to adjust as new information comes in and as the outlook changes. Inevitably, it will.
QUESTION: Thank you, Mr. Chairman. Greg Ip of the Economist. Economists have long believed that central banks cannot affect the unemployment rate in the long run. That is one reason you have seen a move toward central banks being given mandates for low inflation only. Can you explain if the Fed by tying its policy so explicitly to an unemployment threshold is consistent or inconsistent with that long-standing view? And if this is consistent, how is it superior to having a threshold for inflation only? Would the approach you are now taking be possible if the Fed only had a mandate for low inflation?
BERNANKE: It is entirely consistent with your view, with the point that you made. Let me just reiterate it. As we stated in fact in our January set of principles, the central bank cannot control unemployment in the long run. I would add a little bit of a caveat here, which is that very extended periods of unemployment can interfere with the workings of the labor market, and so if the Fed were not to address a large unemployment problem for a long time it might in fact have some influence on the long-term unemployment rate. But as a general rule—and I think this is the right baseline—the long-term unemployment rate is determined by a range of structural features of the economy and a range of economic policies, and not by monetary policy. That being said, what our 6.5% threshold is is not a target but a guidepost in terms of when the beginning of the reduction of accommodation is appropriate—could begin, it could be later than that time, no earlier than that time. It is really more like a reaction function, or a Taylor Rule if you will—I am ready to get the phone call from John Taylor, it is not a Taylor Rule, but it has the same feature that it relates policy to observables in the economy such as unemployment and inflation. What it is basically doing is saying how our policy will evolve over time as the policy evolves. It has no implication for the long-run unemployment rate, which we believe is lower than 6.5%. We think it is somewhere between 5% and 6%, according to our SEP projections. We are a dual-mandate central bank. I think providing information on both sides is more helpful. I understand your point, but I think that providing information on unemployment and inflation is more helpful to the markets, to the public. It allows them to infer how our policy is likely to evolve.
QUESTION: Mr. Chairman. Wyatt Andrews, CBS News. I would still like to hear a little more about why you made this announcement today, specifically, tying Federal Funds policy to the 6.5% unemployment threshold. I am sure you have some sort of theory about what you hope changes in the economy as a result of this announcement. If so, what is it?
BERNANKE: Well, we think it is a better form of communication. We think that by using the thresholds that tie rates to economic conditions that we are more transparent about what is going to determine our policy in the future. The date-based guidance—it served a purpose, but it had the problem that whenever the economic outlook changed the committee was faced with a question of whether it should change the date-based guidance. We did change it a couple of times. But that was a non-transparent process: nobody understood exactly why we did a particular change because we were not providing any kind of fundamental information about how our policies were linked to the underlying outlook. I believe certainly that this approach is superior. I am not saying that it is the best possible approach. There may be other things that we can do. We are always looking to find ways to improve our communication. But I do think that it is more transparent and will allow the markets to adjust to changes in the outlook by changing when they think rate increases are likely to begin. It will act to some extent like an automatic stabilizer. If the outlook worsens, that leads markets to think that the increase in rates will come further in the future, and that will tend to lower longer term rates, and that will tend to be supportive of the economy. So that has an automatic stabilizer-type effect. It offsets adverse shocks. So it is a better form of communication. As I said, we discussed it quite extensively at the last meeting. Frankly, given that it is a relatively complex change, it seemed like it would be a good idea to do it at a meeting where there was a press conference. So we decided that since we were ready to go why not make the change earlier to get the benefits earlier.
QUESTION: As a follow-up, did you see a level of uncertainty in the business community that you hope to solve by this announcement?
BERNANKE: Well at the moment I think that the expectations of the business community and the Federal Open Market Committee happen to be pretty well aligned. If you look at the financial market indicators of the future Federal Funds rate path, it is pretty consistent with the 2015 date-based guidance that we had been providing. I would not say that there was a major inconsistency between what the business community was expecting, what markets were expecting, and what we were expecting. So that wasn’t really the issue. The problem was that looking forward, what happens if there is a significant change either for the better or for the worse in the outlook. Under the date-based guidance, that would require the committee to determine what the new date is and to make that change in a non-transparent way. But under this threshold-based guidance, the markets can make that calculation on their own, and adjust their expectations of when rates will start to rise based only on their own forecast rather than having to wait for the Federal Open Market Committee to give them a date. So we think it is a better approach.
QUESTION: Mr. Chairman, Josh Zimbrunn, Bloomberg News. By 2015 the recovery will be six years old. The average post-war recovery has averaged a little less than five years. We are already banking on a long expansion. You expect interest rates to be at zero in 2015 and your balance sheet to be at $4 trillion. If the business cycle runs out of steam in 2015 and you are still at zero, does the Fed no longer have a forceful response in that situation?
BERNANKE: Well, we have innovated quite a bit in the past few years and it is always possible we could find a new way to provide support for the economy, but it is certainly true that with interest rates near zero and with the balance sheet already large that the ability to provide additional accommodation is not unlimited. That is just a reality. And that is an argument for getting more aggressive now. It is a really good argument for moving to get some momentum that protects the economy from unanticipated shocks that might occur and gets us off the zero bound earlier. So exactly for those reasons the kind of risks that arise when policy interest rates are close to zero—the greater difficulty of providing additional policy support—I think that is an argument for being somewhat more proactive now when we still have the ability to do that and to try to get the economy back to a healthy condition.
QUESTION: Hi Chairman. Donna Borak with American Banker. My question pertains to the Volcker Rule. Regulators earlier this year seemed cautiously optimistic that they would be able to finalize the rule by the end of the year. However, that seems a bit unlikely as of this point. And as you know some lawmakers are calling for a two-year implementation delay on the Volcker Rule. Given the fact that it is has been such a lengthy process, can you tell us how things stand at this point? How much closer do things stand to a final rule? Have the agencies been able to work out their differences? And, if we may, a prediction on when we might actually see a rule?
BERNANKE: We have made quite a bit of progress. It is a difficult and complex rule, as you know. I think I recall 18000 comments. So there has been a lot to look at. Even from foreign commenters about the effects on their bond markets, et cetera. So there has been a lot of work to do. I would say that there has been quite a bit of agreement—I would not say a final agreement but quite a bit of agreement on key points among the regulators at this juncture. Of course, if congress gives us some other instruction we will follow that, but so far we have not received any different instruction so it is our intent to try to get this done early in 2013.
QUESTION: Peter Barnes, Fox Business. Since your last press conference we have had an election. One of the candidates in that election, Governor Romney, said that he would not reappoint you to a third term as Chair. President Obama did not weigh in on the issue but he did win reelection. If the president were to call you and say “Ben, the country needs your continued stewardship at the Federal Reserve. We need you to stay and finish the job and see this through” would you consider it? Would you do it? And, by chance, have you had any conversations to that effect with the president or anybody on his staff?
BERNANKE: To answer the last part, no I haven’t had any conversations. I think the president has quite a few issues he needs to be thinking about from the fiscal cliff to the other appointments and so on. From my own perspective I really don’t have anything to add from the last press conference. I am very much engaged in the difficult issues that we are discussing today and I have not been spending time thinking about my own future. I don’t really have anything to add there.
QUESTION: Two questions taking the Goldfarb Rule into effect. One has to do with the CPI: There is a lot of discussion with the Boehner Plan about the chained CPI. Not as a Fed Chairman but as an economist, is there a logic in going to that? Is it a move that you think should be done separate from the politics of it? And, again with your economist’s hat: the labor market. You talked about the importance not of the 6.5% threshold but of the broader conditions. A big debate—Steve Leesman’s nemesis talks about people being beamed to Mars. In your mind, what is happening to the job market? Are we creating jobs? Is that why it is coming down? Or is it because of the degree of discouraged workers? What is your sense of how quickly it has fallen because of new employment?
BERNANKE: So on the first question, the chain CPI versus the fixed-weight CPI is a technical issue. The chain CPI is technically better according to most economists because it allows for changes in the mix of goods and services that people actually consume more effectively. However, whether, you know, that’s better or more appropriate for say social security indexing or not, I think that’s ultimately a political decision. I suppose a rejoinder would be that neither the CPI nor the chain CPI may necessarily be a particularly good measure of the cost of living for social security recipients. So those are the kinds of questions that Congress is going to have to deal with. The second part of your question?
QUESTION: The debate over the unemployment question—new jobs versus people leaving the labor force.
BERNANKE: Yes. You can see the comparison by looking for example at the household survey which gives estimates of how many people are added to the labor force, how many added to the employed, how many people are leaving the labor force. And it’s part of the decline in unemployment, and indeed all in the last reading, but over the recovery, part of the decline in unemployment has come from declines and participation rates — that is people leaving labor force. Some of that decline in participation appears to be due to longer-run factors, aging and changing patterns of work among women. So those things were probably not directly related to the recession for example. But beyond that downward trend there’s been some additional decline in labor force participation and in the ratio of employment-to-population, which presumably is linked to discouragement about the state of the labor force. So that certainly is part of the issue. That being said, obviously, there has been a good bit of job creation – you could see that either in the household survey or in the payroll establishment survey. So I think there is no doubt that the labor market is considerably better today than it was two years ago. There is not any question about that. But, it’s also the case that many indicators of the labor market remain quite weak — ranging from the number of long-term unemployed , the number of people who have part-time work who would like full-time work, wage growth obviously is very weak, and I could go on. So, it may be that the labor market is even a bit weaker than the current unemployment rate suggests but I think that it is nevertheless the case that there has been improvements since the trough a couple years ago.
QUESTION: Mr. Chairman, Katherine Honda, National Journal. How concerned are you that financial markets will have to tank in order to get lawmakers to reach a deal on the fiscal cliff? And what do you make of the recent complacency? Is there a Wall Street-Washington disconnect?
BERNANKE: Interesting question. I certainly hope that markets will not have to tank. We want to have confidence, not just in markets but in businesses and households as well. The best way that fiscal policymakers can achieve that is by coming to a solution as quickly as possible. Markets have, obviously, already responded up and down—you can see from a day-to-day how they respond to news about the negotiations. But on the other hand if you look at the experience I think a very informative experience of the debt limit debate in August of 2011, that both congress and confidence in markets remained pretty sanguine pretty close up to the point where it looked like there was actually a chance that the debt limit would not be raised. And then, of course, there was a pretty sharp shock—particularly to confidence—about the time of the final debates. So it is not unusual to see markets being complacent. Of course, from the market perspective there is risk in both directions. Things could go badly, but things could go especially well. That would be good news. Maybe markets right now are taking an average of those two possibilities. But again, to reiterate, I do not think that any policymaker including the Fed should be responding to markets. What we should be doing is making policy based on the fundamentals and doing what is best for the economy and I hope that fiscal policymakers will follow that injunction as well.
QUESTION: Mr. Chairman, Steve Beckner of Market News International. With the federal government borrowing $1 trillion a year and now with the Fed on pace to buy about $1 trillion a year in bonds are you concerned about a public and possibly a global perception that the Fed is accommodating not just growth but accommodating federal borrowing needs? And are you concerned about what this might do to the Fed’s credibility and the credibility of U.S. finances in general and the credibility of the dollar, the world’s leading currency?
BERNANKE: First of all, just a couple of facts. We are buying Treasuries and MBS—about half and half, roughly. We are thus buying considerably less than the Treasury is issuing. Moreover, the share of outstanding Treasuries that the Federal Reserve owns is not all that different from what it was before the crisis because while our holdings have increased so has the volume of outstanding debt. So it is not quite evident that there has been such a radical shift there. We have been increasing our balance sheet for some time. We have been very clear that this is a temporary measure. It is a way to provide additional accommodation to an economy that needs support. We have been equally clear that we will normalize the balance sheet, that we will reduce the size of our holdings, whether by letting them run off or by selling assets in the future. This is again only a temporary step. It would be quite a different matter if we were buying these assets and holding them indefinitely. That would be a monetization. We are not doing that. We are very clear about our intentions. And I think up until now it seems that our credibility has been quite good. There is not any sign either of current inflation or of any increases in inflation expectations—looking at financial markets, looking at surveys. This is one of the things that we have to look at. Remember, I talked earlier about the potential costs of a large balance sheet. We want to be sure that there is no misunderstanding, no effect on inflation expectations from the size of our balance sheet. That is one of the things we have to look at. But as of this point there is really no evidence that people are taking it that way. I guess it is worth pointing out—of course we have been focused on the United States here—we are not the only central bank that has increased the size of its balance sheet. The Japanese, the Europeans, the British have all done the same, and more or less the same extent as a share of GDP. I think the sophisticated maker players and the public understand that this is part of a collective need to provide additional accommodation to weak economies and not an accommodation of fiscal policy.
QUESTION: Last but not least, Greg Robb, Marketwatch. There seems to be growing evidence that with some of the MBS purchases banks are holding on to some of the gains and not passing them on to borrowers. Is there anything you can do about that and are you concerned about that?
BERNANKE: The question is about the spread between the mortgage rates that the public pays and the yields on MBS that the banks hold. The question is is that spread widening so that the full benefit of the reduction in MBS yields is not being passed through. That is the question. I had to make sure everybody heard it. Our analysis suggests that it takes time. Two points. The first point is that while we do not expect 100% pass through from MBS yields to mortgage rates, our empirical analysis—and we have had quite a bit of work done on this issue—suggests that over time the great majority of changes in MBS yields does get passed through to mortgage rates. We do anticipate over time that the benefit will be seen by retail customers. And we have already seen since September a pretty significant decline in retail mortgage rates. But one thing that is perhaps confusing this issue is that there are other things happening in the economy that are affecting these spreads. For example, there are capacity limitations which are allowing banks to charge higher yields. There are extra costs like concerns about outback risk, for example. There is higher G-fees. There are a number of things happening in the economy which would tend other things equal to raise that spread between mortgage rates and MBS yields. That is unfortunate. What we can try to do there is try to encourage good policy—for example on putbacks, that will try to diminish perceived risk and cost to banks of making mortgage loans. But again I think most of those things, like G-fees for example, are not within our control. Taking all those issues as constant, it does seem to be that over a period of time, not immediately but over a period of time, most declines in MBS yields do find their way to mortgage customers and thereby strengthen the housing market.
