By Steven K. Beckner
(MNI) – Federal Reserve Chairman Ben Bernanke stressed Thursday
that the Fed is “focusing intently on supporting job creation,” even
while acknowledging that the level of employment is largely due to
forces out of the Fed’s control.
In prepared remarks at a Town Hall Meeting with soldiers at Fort
Bliss, Texas, Bernanke defended the Fed’s zero interest rate stance and
asset purchases, saying they should support both consumer spending and
business investment.
He did not openly hint at further monetary stimulus, but in saying
that inflation is on track to settle at or below 2% and that the economy
is “far short” of full employment, he suggested there is room for the
Fed to do more if the recovery falters and/or disinflaiton threatens to
become excessive.
At his press conference following last Wednesday’s Federal Open
Market Committee meeting, Bernanke made clear the Fed’s policymaking
body is prepared to ease more if needed — either using its
communication tools or additional asset purchases.
“We are prepared to take further action,” Bernanke he told
reporters. “We’ve already taken quite a bit of action but we are
prepared to do more and we have the tools to do more if that’s
appropriate.”
The Fed chief said nothing to contradict that statement in his
speech.
It has been speculated that Bernanke made a point of visiting Texas
to demonstrate the Fed’s independence after the state’s governor and
Republican presidential candidate Rick Perry commented a few months ago
that the Fed Chairman might be treated “ugly” in Texas if he continued
to push down interest rates. But MNI understands there is no truth to
such talk.
Bernanke said he had journeyed to the army base because he likes to
“meet with groups with a wide range of backgrounds and perspectives on
our economy to listen and learn, as well as to explain what the Federal
Reserve is doing to try to improve our economic situation.”
And he added, “I’m here because the men and women in military
service, like all Americans, are profoundly affected by the economic
challenges our nation has faced these past several years.”
“Your hometowns may be struggling with foreclosures,” he said. “You
may have had difficulty getting a loan to buy a car or a house. You may
have family members who have had trouble finding employment in a tough
job market. You may be worried about your own job prospects when the
time comes for you to leave the military.”
Bernanke said the Fed is “working hard — both as central bankers
and as financial regulators — to help restore our nation’s prosperity.”
He said that, thanks to the Fed’s efforts to combat the financial
crisis and recession, “our economy has been growing and adding jobs for
more than two years now.” But he acknowledged that “for a lot of people
… it doesn’t feel like the recession ever ended.”
“The unemployment rate remains painfully high, and more than
two-fifths of the unemployed have been out of work for longer than six
months, by far the highest ratio since World War II,” he said. “These
problems are very serious, and we at the Federal Reserve have been
focusing intently on supporting job creation.”
As for “the other half” of the Fed’s “dual mandate” — controlling
inflation — Bernanke suggested this is not a significant concern at
this time. If anything, he implied, inflation could become too low
rather than too high relative to the Fed’s implicit target.
“Although spikes in oil and food prices, and other transitory
factors, pushed inflation up earlier this year, inflation appears to be
moderating, and we expect, based on the best information that we have
today, that it will remain reasonably close to our objective of 2% or a
bit less for the foreseeable future,” he said.
Bernanke drew a contrast between the two sides of the dual mandate
in terms of how much influence the Fed can have.
“In the longer term, monetary policy is the main determinant of
inflation, and so Federal Reserve policymakers have considerable
latitude to choose our longer-term inflation goal,” he said. “In
contrast, ‘maximum employment’ depends on many factors outside of the
Federal Reserve’s control, such as the skills of the workforce and the
pace of technological innovation.”
Nevertheless, he suggested the Fed does have a role to play in
reducing unemployment.
Estimating that “the U.S. economy could sustain an unemployment
rate of somewhere between 5 and 6% without generating a buildup of
inflation pressures,” Bernanke said “with unemployment currently at 9%,
our economy is certainly falling far short of maximum employment.”
“That high unemployment rate is why the Federal Reserve is focusing
its monetary policy at strengthening the recovery and job creation,
including keeping short term interest rates near zero and longer-term
rates, such as mortgage rates, at the lowest levels in decades,” he
said.
The Fed chief said “keeping borrowing costs very low supports
consumer purchases of houses, cars, and other goods and services, as
well as business investment in new equipment, software, and facilities.”
“Over time, greater demand on the part of households and businesses
leads to increased economic activity and employment,” he said.
Defending large-scale asset purchases or “quantitative easing,” he
said “it is important to understand that this type of activity isn’t the
same as government spending. We will sell the securities back into the
market or simply allow them to mature as part of the process of
tightening monetary policy when the economy improves.”
“In the meantime, we earn interest on the securities we hold,” he
said. “In fact, the Federal Reserve’s securities purchases and other
actions during and after the crisis have had the side effect of reducing
the federal budget deficit. Last year and the year before, we returned a
total of $125 billion of those earnings to the U.S. Treasury, and
payments to the Treasury in the current year will be substantial as
well.”
Turning to the Fed’s regulatory responsibility, he said it is
working with other regulators to “significantly increase the financial
reserves that banks — especially the largest banks that can put the
financial system at risk — must hold against possible losses” and
“toughening the restrictions on the kinds of financial transactions that
banks can undertake.”
Returning to a theme which he explored briefly in his late August
speech in Jackson Hole, Bernanke suggested there are limits to what the
Fed can do and that fiscal and regulatory authorities also bear a
responsibility for revitalizing the economy.
“Of course, the Federal Reserve was never intended to shoulder the
entire burden of promoting economic prosperity,” he said. “Fostering
healthy growth and job creation is a shared responsibility of all
economic policymakers, in close cooperation with the private sector.”
“Spending and tax policy is of critical importance, but a wide
range of other policies — pertaining to labor markets, housing, trade,
taxation, and regulation, for example — also have important roles to
play,” he added.
Bernanke also had some advice for the soldiers. He told them they
should take advantage of training opportunities while they’re in the
service, exploit the education benefits due them after they leave the
army and take care to learn how to take care of their personal finances.
Accompanying Bernanke to the Fort Bliss event was Dallas Federal
Reserve Bank President Richard Fisher.
** Market News International **
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