WASHINGTON (MNI) – The following is the second and final part of
the complete text of Federal Reserve Chair Ben Bernanke’s semi-annual
testimony to the House Financial Services Committee Wednesday:
At our January meeting, participants agreed that strains in global
financial markets posed significant downside risks to the economic
outlook. Investors’ concerns about fiscal deficits and the levels of
government debt in a number of European countries have led to
substantial increases in sovereign borrowing costs, stresses in the
European banking system, and associated reductions in the availability
of credit and economic activity in the euro area. To help prevent
strains in Europe from spilling over to the U.S. economy, the Federal
Reserve in November agreed to extend and to modify the terms of its swap
lines with other major central banks, and it continues to monitor the
European exposures of U.S. financial institutions.
A number of constructive policy actions have been taken of late in
Europe, including the European Central Bank’s program to extend
three-year collateralized loans to European financial institutions. Most
recently, European policymakers agreed on a new package of measures for
Greece, which combines additional official-sector loans with a sizable
reduction of Greek debt held by the private sector. However, critical
fiscal and financial challenges remain for the euro zone, the resolution
of which will require concerted action on the part of European
authorities. Further steps will also be required to boost growth and
competitiveness in a number of countries. We are in frequent contact
with our counterparts in Europe and will continue to follow the
situation closely.
As I discussed in my July testimony, inflation picked up during the
early part of 2011.5 A surge in the prices of oil and other commodities,
along with supply disruptions associated with the disaster in Japan that
put upward pressure on motor vehicle prices, pushed overall inflation to
an annual rate of more than 3 percent over the first half of last year.
As we had expected, however, these factors proved transitory, and
inflation moderated to an annual rate of 1-1/2 percent during the second
half of the year–close to its average pace in the preceding two years.
In the projections made in January, the Committee anticipated that, over
coming quarters, inflation will run at or below the 2 percent level we
judge most consistent with our statutory mandate. Specifically, the
central tendency of participants’ forecasts for inflation in 2012 ranged
from 1.4 to 1.8 percent, about unchanged from the projections made last
June.7 Looking farther ahead, participants expected the subdued level of
inflation to persist beyond this year. Since these projections were
made, gasoline prices have moved up, primarily reflecting higher global
oil prices–a development that is likely to push up inflation
temporarily while reducing consumers’ purchasing power. We will continue
to monitor energy markets carefully. Longer-term inflation expectations,
as measured by surveys and financial market indicators, appear
consistent with the view that inflation will remain subdued.
Monetary Policy
Against this backdrop of restrained growth, persistent downside
risks to the outlook for real activity, and moderating inflation, the
Committee took several steps to provide additional monetary
accommodation during the second half of 2011 and early 2012. These steps
included changes to the forward rate guidance included in the
Committee’s post-meeting statements and adjustments to the Federal
Reserve’s holdings of Treasury and agency securities.
The target range for the federal funds rate remains at 0 to 1/4
percent, and the forward guidance language in the FOMC policy statement
provides an indication of how long the Committee expects that target
range to be appropriate. In August, the Committee clarified the forward
guidance language, noting that economic conditions–including low rates
of resource utilization and a subdued outlook for inflation over the
medium run–were likely to warrant exceptionally low levels for the
federal funds rate at least through the middle of 2013. By providing a
longer time horizon than had previously been expected by the public, the
statement tended to put downward pressure on longer-term interest rates.
At the January 2012 FOMC meeting, the Committee amended the forward
guidance further, extending the horizon over which it expects economic
conditions to warrant exceptionally low levels of the federal funds rate
to at least through late 2014.
In addition to the adjustments made to the forward guidance, the
Committee modified its policies regarding the Federal Reserve’s holdings
of securities. In September, the Committee put in place a maturity
extension program that combines purchases of longer-term Treasury
securities with sales of shorter-term Treasury securities. The objective
of this program is to lengthen the average maturity of our securities
holdings without generating a significant change in the size of our
balance sheet. Removing longer-term securities from the market should
put downward pressure on longer-term interest rates and help make
financial market conditions more supportive of economic growth than they
otherwise would have been. To help support conditions in mortgage
markets, the Committee also decided at its September meeting to reinvest
principal received from its holdings of agency debt and agency
mortgage-backed securities (MBS) in agency MBS, rather than continuing
to reinvest those proceeds in longer-term Treasury securities as had
been the practice since August 2010. The Committee reviews the size and
composition of its securities holdings regularly and is prepared to
adjust those holdings as appropriate to promote a stronger economic
recovery in the context of price stability.
Before concluding, I would like to say a few words about the
statement of longer-run goals and policy strategy that the FOMC issued
at the conclusion of its January meeting. The statement reaffirms our
commitment to our statutory objectives, given to us by the Congress, of
price stability and maximum employment. Its purpose is to provide
additional transparency and increase the effectiveness of monetary
policy. The statement does not imply a change in how the Committee
conducts policy.
Transparency is enhanced by providing greater specificity about our
objectives. Because the inflation rate over the longer run is determined
primarily by monetary policy, it is feasible and appropriate for the
Committee to set a numerical goal for that key variable. The FOMC judges
that an inflation rate of 2 percent, as measured by the annual change in
the price index for personal consumption expenditures, is most
consistent over the longer run with its statutory mandate. While maximum
employment stands on an equal footing with price stability as an
objective of monetary policy, the maximum level of employment in an
economy is largely determined by nonmonetary factors that affect the
structure and dynamics of the labor market; it is therefore not feasible
for any central bank to specify a fixed goal for the longer-run level of
employment. However, the Committee can estimate the level of maximum
employment and use that estimate to inform policy decisions. In our most
recent projections in January, for example, FOMC participants’ estimates
of the longer-run, normal rate of unemployment had a central tendency of
5.2 to 6.0 percent.8 As I noted a moment ago, the level of maximum
employment in an economy is subject to change; for instance, it can be
affected by shifts in the structure of the economy and by a range of
economic policies. If at some stage the Committee estimated that the
maximum level of employment had increased, for example, we would adjust
monetary policy accordingly.
The dual objectives of price stability and maximum employment are
generally complementary. Indeed, at present, with the unemployment rate
elevated and the inflation outlook subdued, the Committee judges that
sustaining a highly accommodative stance for monetary policy is
consistent with promoting both objectives. However, in cases where these
objectives are not complementary, the Committee follows a balanced
approach in promoting them, taking into account the magnitudes of the
deviations of inflation and employment from levels judged to be
consistent with the dual mandate, as well as the potentially different
time horizons over which employment and inflation are projected to
return to such levels.
Thank you. I would be pleased to take your questions.
-more- (part 2 of 2)
** Market News International Washington Bureau: 202-371-2121 **
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