Friday, April 27, 2012

Ben Bernanke’s April 25, 2012 Press Conference – Notable Aspects

On Wednesday, April 25, Ben Bernanke gave his scheduled press conference.

Here are Ben Bernanke’s comments I found most notable, in the order they appear in the transcript, although I don’t necessarily agree with them.  These comments are excerpted from the "Transcript of Chairman Bernanke’s Press Conference"(preliminary)(pdf) of April 25, 2012, with accompanying economic projections (pdf).

Bernanke’s responses as indicated to the various questions:
Thank you Mr. Chairman, Darren Gersh, Nightly Business Report: Some of your critics, I'm sure you're not going to be surprised think that you're still being too cautious that unemployment is still high, the economy may be slowing, inflation is subdued, but I know you just talked about the balance sheet. But given that, is the Committee now any closer to QE3 than it was at its last meeting?
Chairman Bernanke: Well first, the Committee has certainly been bold and aggressive in terms of easing monetary policy. We've maintained the Federal Funds Rate close to zero since late 2008. We've had two rounds of so-called quantitative easing. We've had a Maturity Extension Program which is ongoing. We have offered a guidance about the Federal Funds Rate that goes into at least late 2014. So we had been very accommodative and we remained prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target. So in particular, we will continue to assess, you know, looking at the economic outlook, looking at the risk, whether or not unemployment is making sufficient progress towards this longer run, normal level, and whether inflation is remaining close to target.  And if appropriate and depending also on assessment of the costs and risks of additional policy actions, we are--remained entirely prepared to take additional balance sheet actions if necessary to achieve our objectives. So those tools remain very much on the table and we will not hesitate to use them should the economy require that additional support.

Binyamin Appelbaum, New York Times: Unemployment is too high and you said you expect it to remain too high for years to come. Inflation is under control and you say that you expect it to remain under control. You said that you have additional tools available for you to use, but you're not using them right now. Under these circumstances, it's really hard for a lot of people to understand why you are not using those tools right now. Could you address that and specifically could you address whether your current views are inconsistent with the views on that subject that you held as an academic.
Chairman Bernanke: Yeah. Let me tackle that second part first. So there's this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. Our--my views and our policies today are completely consistent with the views that I held at that time. I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation, that is falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer--are not exhausted, there are still other things that the central bank can do to create additional accommodation. Now looking at the current situation in United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target. Likewise, we have been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation and clearly when you're in deflation and in recession, then both sides of your mandates, so to speak, are demanding additional accommodation. In this case is we are not in deflation, we have an inflation rate that's close to our objective. Now, why don't we do more? Well, first I would again reiterate that we are doing great deal, policy is extraordinarily accommodative, we--and I won't go through the list again, but you would--you know all the things that we have done to try to provide support to the economy. I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction--a slightly increased pace of reduction in the unemployment rate? The view of the Committee is that that would be very reckless. We have--we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation which has proved extremely valuable in that we've been be able to take strong accommodative actions in the last 4 or 5 years to support the economy without leading to a unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.
Greg Robb: Thank you. Greg Robb, Judging from some of the speeches lately from Fed officials, it looks like too-big-to-fail is, basically, they view this as the next step where the attention should be paid and work should be done. There's even proposal to have legislation to force bank divestitures. Could you talk about your views on these things? Thank you.
Chairman Bernanke: Yes. I believe that too-big-to-fail was [an] important cause, at least a propagating mechanism of the financial crisis. And I believe it's absolutely incumbent upon us to do all we can to eliminate too-big-to-fail. And what I mean by that is a situation where a failing firm is bailed out because its collapse would have such adverse circumstance--consequences for the rest of the financial system. So, we are working to get rid of too-big-to-fail, and I think making some progress.
First of all, we are very substantially increasing the supervisory and regulatory oversight of large financial institutions that includes, for example, the Basel III rules that require higher capital for all banks but particularly for systemically important banks, more liquidity requirements; stress tests; a range of tougher supervisory requirements that are--many of them are embedded in the rule we put out on 165, 166, that section of the Dodd-Frank Act. So, the first thing we're going to do is make sure that these large institutions are stronger; that it's much harder for them to fail; and that they are watched much more carefully and more actively by the supervisors.
The other part of eliminating too-big-to-fail though is that in that circumstance where a large complex financial firm does come to the brink of failure that it must be allowed to fail. It must be safe to fail. And in that respect, one of the principal tools that we've gotten from Dodd-Frank is a so-called Orderly Liquidation Authority, which is the FDIC's tool, and the Federal Reserve is working closely with the FDIC there. The idea is to apply the same kind of bank resolution tools that the FDIC has used for many years on domestic banks to large complex financial firms.
Now, obviously, the complexity and the international aspects of these firms make that a much more challenging task, but I think we're making progress there. We have put out rules about so-called living wills, which will require large financial firms to essentially plan out how they would be disassembled. And we've continued to talk with international colleagues about how we would cooperate if a multinational firm had to be put into receivership. And indeed, part of the reason that there's been some downgrade or potential downgrade for some U.S. financial institutions is the judgment of the ratings agencies that the so-called implicit government support that these institutions have is less than in the past. And so, I think ultimately what we'll need to have is a situation where large firms are both making judgments about their size and complexity based only on the economic benefits and costs, and not on too-big-to-fail considerations, and that if there is failure, that it can be done and achieved without highly adverse consequences for the financial system in the economy. And that's our objective and that's the way I think to end too-big-to-fail.
Akio Fujii, Nikkei: Thank you, Chairman. I am Akio Fujii from Nikkei Newspaper. My question is to follow up further your comment about Japan and U.S. Now are you confident U.S. economy would avoid longterm stagnation like we had in Japan, or so-called Japanization? Andif it's the case, only price response make a difference of Japan and U.S., or are there any other factors that make a difference?
Chairman Bernanke: The last part again. Other measures?
Akio Fujii, Nikkei: Yes, price response is the only reason make a difference U.S. and Japan or are there any other factors to make a difference of U.S. and Japan situation?
Chairman Bernanke: Well, I think the--I would draw two distinctions between U.S. and Japan, or the Japanese experience. The first is that, as I mentioned earlier--I think this is very important--is that we acted aggressively and preemptively to avoid deflation. Now of course Japan had a much bigger bubble and much bigger shock when the bubble collapsed. And so these differences may be certainly understandable. But again, we did avoid deflation.
The other thing which I think we have done recently well here in the United States was that we moved fairly quickly to make sure that our banks were recapitalized and where we were recognizing their bad assets. And I think the stress tests that we conducted last month are good evidence that the U.S. banking system is considerably stronger and indeed much more resilient than it was a couple of years ago.
So those two things are positives and would tend to suggest that we will avoid some of the problems that Japan has faced. That being said, I think it's always better to be humble and just to, you know, avoid being too confident. And we need to continue to maintain a strong monetary policy support to make sure that the economy continues on the recovery path and returns to a more normal situation.
Scott Spoerry: Scott Spoerry with the CNNMoney, sir. I wanted to ask you about the labor force participation rate. It's at the lowest level since the early '80s. Can you talk about why people are dropping out of the job market, whether it's a permanent structural problem and what convinces you that things may change? If I could just a pop a second question to follow up on Steve and the bonds. Your colleague Sheila Bair wrote this week that her--about her concern over being in a bond bubble. She said you should declare victory, and you should do something about puncturing that bubble before it gets too much out of control. Can you respond to that too?
Chairman Bernanke: On declaring victory, I think it's a little premature to declare victory. I think that keeping interest rates low is still appropriate for our economy. As for the bond bubble, interest rates are low for a lot of reasons. They include monetary policy of course. But they also include a weak economy, low inflation expectations and safe-haven demands for U.S. treasuries. So of course interest rates will rise at some point. We hope that they do because that would be an indication that the economy is recovering and strengthening. And I think it's important for holders of long-term securities to manage their risks and pay attention to that. But all that being said, I think again that there are both good reasons to continue monetary ease and good reasons for interest rates to be low.
First part of your question was...
[Inaudible Remark]
Chairman Bernanke: Participation, labor participation, yes. Actually we had a very good discussion of that at the meeting, 'cause it is an important issue trying to assess how much of the change in employment is structural, how much is cyclical and so on. There is in fact a downward trend in labor participation in the United States. It comes from first the fact that we're no longer getting increased participation from women. Female participation has leveled out. And secondly because as the society ages. And also for other reasons, male participation has been declining overtime. So there is a downward trend that we have to take into account.
The participants at the meeting, at least some of them suggested that a good bit of the decline in participation that we've seen in the last few years does represent cyclical factors. Much of it is young people for example, who presumably are not out of the labor force indefinitely. But given the weak job market, they are going to school or doing something else rather than working. So one possibility and one reason why the unemployment rate may not fall as quickly going forward is that as the economy strengthens, as the labor market strengthens, many of these folks are going to come back in the labor force looking for work, which I think would be a good thing. But we'll just have to see. But I do think, I think I would agree with the argument that a significant part of the decline over and above the downward trend in the participation rate is reflecting cyclical factors and should reverse when the economy gets stronger.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1399.98 as this post is written

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