WASHINGTON (MNI) – The following is the transcript of a response of
Federal Reserve Chairman Ben Bernanke to a question during his Thursday
afternoon news conference:
Bernanke, responding to a question from MNI: That’s an important
question. Michael Woodford, who by the way is my former colleague and
co-author and friend so I know him quite well and know his work quite
well — I think actually the thrust of his research is that forward
guidance communication about future policies, in fact, the most powerful
tool that central banks have when the interest rate is close to zero.
And he advocates policies like nominal GDP targeting, for example, that
would essentially require credibility lasting many years. The
implication being that the fed would target the nominal level of GDP and
promise to do that for many years in the future even if inflation, you
know, grows as part of that policy.
So his own perspective is that credibility is the key tool that
central banks have in order to get traction at the zero or lower bound.
Whether we have the credibility to persuade markets that we’ll follow
through is an empirical question. And the evidence, which I also again
discussed in my remarks recently is that when we’ve announced extended
guidance, the financial that markets have responded to that. That
private sector forecasters have changed their estimates of what
unemployment and inflation will be when the fed begins to remove
accommodation so the empirical evidence is that — is that our
announcements do have considerable credibility and I think there’s good
reason for that, which is that we have talked a lot both publicly and
privately about the rationale for maintaining rates low even as the
economy strengthens and I think the basic ideas are broadly espoused
within the committee and so there is a consensus that even as the
personnel change and so going forward, that this is the appropriate
approach and that by following through, we will have created a reserve
of credibility that we can use in any subsequent episodes that do occur.
** MNI Washington Bureau: 202-371-2121 **