By Steven K. Beckner
“There will be periods when, for reasons out of our control,
inflation and unemployment will move away from their desired levels,”
Bernanke continued. “If in those situations, the speed at which — I
think ‘tolerate’ might be too strong of a word because we always want to
get both sides of the mandate back to their desired levels — but, the
speed at which we would enforce that return would depend on what’s
happening with the other variable.”
“So, for example, if inflation did go above target by modest
amount, we would certainly try to get it back down to target,” he went
on. “But if unemployment were very high, that would lead us to be more
cautious and slower in returning to target.”
MNI asked Bernanke why the FOMC kept forward guidance language in
its policy statement instead of letting the new funds rate forecasts
speak for themselves — something Richmond Fed President Jeffrey Lacker
preferred in dissenting against the revised policy statement.
Bernanke began his reply by saying that one of the Fed’s “two main
tools” to stimulate the economy at the zero lower bound for the funds
rate is to “communicate that rates will be lower for longer. That will
ease financial conditions and be a way that we can affect the state of
the economy.”
He said “the reason that we just don’t release the economic
projections and leave it at that, is because while the economic
projections of future policy rates are an important input to our policy
discussions, around the table, the decision ultimately is made by the
Federal Open Market Committee, you know, which is the voters, sitting
around the table, and in the process by which we exchange ideas and make
arguments and come to collective determination.”
“So we don’t set the federal funds interest rate by having members
send in their vote and not having a meeting,” he said. “We have a
meeting for a reason, which is to talk to each other and try to come to
some kind of consensus.”
“So the FOMC will always in some sense trump the projections of
forward interest rates, but clearly because the participants and people
around the table are the same, the projections should give significant
information about where the FOMC is likely to go,” he added.
Bernanke was also asked whether there is a danger that delaying the
projected funds rate lift-off date sends a pessimistic signal to the
public and financial markets.
He replied that there’s a potential for sending such a signal
“whenever the Fed takes policy action,” and he said the Fed has to take
that into consideration. But he said, that “generally speaking, those
considerations are outweighed by the need to maintain accommodative
financial conditions so that it’s attractive to firms to invest and hire
and attractive for those who are eligible to buy homes, and so on. And I
think that that, ultimately, is more powerful than the signal from the
change in policy.”
“I wouldn’t overstate the Fed’s ability to massively change
expectations through its statements,” he continued, adding, “it’s
important for us to provide the right amount of stimulus to help our
economy recover from its currently underutilized condition.”
Bernanke said the FOMC held a discussion about the balance sheet
and said the minutes of the meeting will include a “qualitative”
information about the balance sheet.
“The reason that I cannot provide all of that information now is
basically that we received … a whole range of qualitative comments,
and we had further discussion during the meeting yesterday and today,
and so, we need a little time to summarize that….”
After all FOMC participants approve the minutes, he promised “a
definitive statement of what we currently know about the balance sheet.”
Bernanke reiterated that “expanding the balance sheet certainly
remains an option.” Beyond that, he recalled that the minutes of the
June 2011 meeting included a statement of principles for the eventual
exit strategy and said those “remain in force.”
For the first time all 17 FOMC participants incorporated
projections of the federal funds rate (and the timing of rate hikes)
with their economic forecasts in the Summary of Economic Projections
(SEP), and Bernanke sought to explain their purpose in his opening
statement.
“That is the path of policy that each participant judges as most
likely to foster mandate outcomes for employment and inflation if the
economy evolves as expected,” he said. “These judgments of our future
policy underlie projections of growth, unemployment and inflation.
“Importantly, these policy assessments should not be viewed as
unconditional pledges,” he stressed. “Rather, just as with our economic
projections, these policy projections reflect the information available
at the time of the forecast and are subject to future revision in light
of evolving economic and financial conditions.”
“Based on current information, 11 participants expect that the
appropriate federal funds rate at the end of 2014 will be at or below 1%
while six participants and higher rates at that time,” Bernanke noted.
“In effect, those judgments are reflected in today’s meeting statement
in which the committee indicated that economic conditions are likely to
warrant exceptionally low levels of the federal funds rate at least
through late 2014.”
Bernanke conceded that the FOMC’s ability to forecast either the
economy or the appropriate path of monetary policy is imperfect, but
said it must still make the effort and be prepared to revise its
projections if necessary.
“Nevertheless, we have to make a best guess,” he said. “It’s
certainly possible that we will be either too optimistic for too
pessimistic in which case we’ll have to adjust both our forecasts and
policy expectations.”
“That being said … the zero lower bound on policy rates, at
least according to many estimates, is still binding,” he said. “That
is, even in the economy were a bit stronger, the very low
interest rates we currently have would still be valid, still be
appropriate.”
“And so for that reason, unless there’s a substantial strengthening
of the economy in the near-term, I would think that it’s a pretty good
guess that we will be keeping rates low for some time from now,” he
added.
Bernanke emphasized 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,” he said, suggesting that reporters “look at the
median, the middle of the distribution (of funds rate forecasts),
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.”
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** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,MT$$$$,M$$BR$]
