–Fed Housing White Paper Did Not Take Sides

WASHINGTON (MNI) – The following are excerpts from Federal Reserve
Chairman Ben Bernanke’s press conference following the Federal Open
Market Committee meeting Wednesday:

“Today, we announced a further extension of the expected period of
low rates. By issuing these expected policy rate information, we hope to
convey to the market that the extent to which there is support on the
committee for maintaining rates at a low level for a significant time.
So, you know, I don’t accept the premise that we’ve been passive. We’ve
actually been quite active in our policy. And in one respect, the low
level of inflation is a validation in the following sense, there at were
some who were very concerned that our balance sheet policies and the
like would lead to high inflation. There’s certainly no sign of that yet
and it has not shown up either in financial markets or outside
forecaster’s expectations.

“That being said as I mentioned earlier, if the situation continues
with inflation below target and unemployment declining at a rate which
is very, very slow , then more our framework the logic of our framework
says we should be looking for ways to do more. It’s not completely
straightforward, because, of course, we’re now dealing with a various
eye tie of non-standard policy tools . We cannot lower the fund rate 25
basis points like in the good old days. But your basic point is right,
that we need to adopt policies that will both achieve our inflation
objectives and help the economy recover, as quickly as feasible. And I
would say that your question, actually , and the earlier question, shows
a benefit of explaining this framework because the framework makes very
clear that we need to be thinking about ways in which we can provide
further stimulus, if we don’t get some improvement in the pace of the
recovery and normalization of inflation.

—

Would you leave chairmanship if Republicans won in November and asked
you to?

“I’m not going to get involved in political rhetoric. I’m going to
stay completely away from that. I have a job to do. And as long as I’m
here, I will do everything I can to help the federal reserve achieve
it’s dual mandate of price stability and maximum employment. That’s my
answer to that last part as well. I’m not going to be thinking about
hypothetical situations in the future. In the case of the savers, you
know, we think about all these issues and we certainly recognize that
the low interest rates that we’re using to try to stimulate investment
and expansion of the economy , also impose a cost on savers who have a
lower return. And we do hear about that obviously. And we do think about
that. I guess the response I would make, is that the savers in our
economy are dependent on a healthy economy in order to get adequate
returns. In particular, people own stocks and corporate bonds and other
securities as well as say, treasury securities. And if our economy is in
really bad shape, then they’re not going to get good returns on those
investments. So, I think what we need to do as, is often is the case,
when the economy goes into a very weak situation, then low interest
rates are needed to help restore the economy to something closer to a
full employment and I to increase growth and that turn will lead
ultimately to higher returns across all assets for savers and invest
toes. So that’s — so I think that’s how we would explain. It but,
again, we recognize that during periods like this, savers are getting a
lower return. One reason why it’s extremely important for us to maintain
price stability, of course S. that at least that minimizes any losses
due to inflation that savers might suffer.”

—

How do you read the projections to determine the central tendency?

“Well, again, I first want to emphasize that there’s no
mechanical
relationship between these projections and the outcomes of FOMC
decisions. Of course they’re a big input into the decisions but it’s
collective decision. And if you want to draw a line I guess I would — I
guess my suggestion would be to look at the median, the mid of the
distribution, because we do have a democratic process in the committee.
And so the median would give you a sense of where the weight balances
against higher in favor of higher or lower rates. Again, we did note
that in support of our assessment of late 2014, which is a committee
decision and, of course, there was a 9-1 vote in favor of that, but that
is supported by the observation that 11 of the 17 participants expect
funds rate at the end of 2014 to be 1% or less. Presumably takeoff would
not be much earlier than that. In terms of future atitions, There’s a
lot of ways we could go. We could provide, for example, more relation —
information about the relationships between individuals, policy
preferences and their forecasts and so on. But there’s nothing specific
now that has been decided. And we have a very capable subcommittee
which is charged with continual assessment and analysis of possible ways
of imare proofing transparency. We will be looking at additional
possibilities and would welcome feedback for that matter. But there’s
nothing specific planned at this point.

—

Does the Fed favor mortgage principal reductions?

“Well, the Federal Reserve obviously has a very strong interest in
the housing sector. And the weakness of the housing sector is an
important reason why the economy is not recovering more robustly. And
the problems in the housing finance are part of the reason why monetary
policy has not been more powerful. Because part of our transmission
mechanism is through lower interest rates, which affects refinancing and
it affects sales, and purchases as well. So, in addition to that, as
bank supervisors we have considerable interest in servicing in loan
modifications and in delinquencies and all the aspects of mortgage
lending. So we have a considerable interest in this area. And as you
say, we did a white paper, which looked at a number of issues, including
refinancing and mortgage finance. And I think it’s important to say that
our intent in that white paper was to provide the benefit of our
analysis to the public, and to those who will be making policy. We did
not take specific stands on individual issues. What we tried to do is
provide the pros and the cons and provide some context for these
debates. So we did discuss refinancing. We did discuss principal
forgiveness. And I would say that there’s a variety views about
principal forgiveness in the Federal Reserve system and there’s no
official position. There seems very likely principal forgiveness could
be helpful, depending on how it’s structured, in reducing delinquencies.
There are also some potential drawbacks. One of them is the fact that
the amount of negative equity in the United States is about $700 billion
which is enormous. And so there’s no conceivable program that will put
everybody in the country above water. And so I think the issue then
becomes, if we have $20 billion or $25 billion or whatever the number
may end up being in this (attorneys general) settlement, you know, what
is the most cost effective way to help as many people as possible? And I
think that’s an ongoing debate. But, with respect to principal
reduction, I have spoken about this in the past and it certainly has
some advantages. A lot depends on how it’s structured and whan the
alternatives are that you’re considering.”

—

Could the Fed also be sending a negative signal by extending the
low-rate environment, suggesting the economy is worse off than people
think?

“Whenever the FED takes policy action there’s also potential of
signal. That’s not true just in these current times but every time the
FED lowers or increases interest rates. That’s something we have to
think B I think generally speaking, that those considerations are out
weighed by the need to maintain accommodate a financial conditions so
that it’s attractive to firms to invest in hire. And attractive for
those who are eligible to buy homes, and so on. And I think that that,
ultimately, is more power full than the signal from the change in
policy. In particular, the markets and the news media are very good at
picking up the underlying economic data and making assessments of the
state of the economy and reporting what different people think about the
economy. So I wouldn’t overstate the FED’s ability to massively change
expectations through its statements, for example.”

** Market News International Washington Bureau: 202-371-2121 **

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