Transcript: Remarks by Federal Reserve Chairman Ben Bernanke on Dec. 12, 2012
Edited by Jenny Jiang
Transcript of remarks by Federal Reserve Chairman Ben Bernanke at a press briefing on Dec. 12, 2012:
It’s been about 3.5 years since the economic recovery began. The economy continues to expand at a moderate pace.
Unfortunately, however unemployment remains high. About 5 million people – more than 40% of the unemployed – have been without work for 6 months or more, and millions who say they would like full-time work have been able to find only part-time employment or have stopped looking entirely.
The conditions now prevailing in the job market now represent an enormous waste of human and economic potential.
A return to broad-base prosperity will require steady improvement in the job market, which in turn require stronger economic growth.
Meanwhile, apart from some temporary fluctuations largely reflected swings in energy prices, inflations remain tame and appears likely to run at or below the Federal Open Market Committee’s 2% objective in coming quarters and over the longer-term.
Against the macroeconomic backdrop that includes both high unemployment and subdued inflation, the FOMC will maintain its highly accommodative policy.
Today, the committee took several steps.
First, it decided to continue with purchases of agency mortgage-backed securities initiated at the September meeting at a pace of $40 billion per month. Second, the committee decided to purchase longer-term Treasury securities initially at a pace of $45 billion per month after its current program to extend the average maturity withholdings is completed at the end of the year.
In continuing its asset purchases, the committee seeks to maintain downward pressure on the longer-term interest rates to keep financial conditions accommodative, thereby promoting hiring and economic growth while ensuring that inflation over time is close to our 2% objective.
Finally, the committee today also modified its guidance about future rate policy to provide more information to the public about how it will react to evolving economic conditions. I’ll return to this change in our communication after discussing our decision to continue asset purchases.
Although the committee’s announcement today specified the initial monthly pace and composition of asset purchases, it did not give specific dates in which the program may be modified or ended. Instead, the pattern of future asset purchases will depend on the committee’s evaluation of incoming information in two respects.
First, we expect to continue asset purchases until we see a substantial improvement in the outlook for the labor market in a context of price stability.
In assessing the extent of progress, the committee will be evaluating a range of labor market indicators, including the unemployment rate, payroll employment, hours worked, and labor force participation among others. Because increases of demand and production are normally precursors to improvements to labor market conditions, we’ll also be looking carefully at the pace of economic activity more broadly.
Second, the committee will be monitoring economic and financial developments to assess both the efficacy and possible drawbacks of its asset purchase programs.
Federal Reserve’s asset purchases over the past few years have provided important support to the economy, for example, by helping to keep mortgage rates historically low.
The committee expects this policy tool to continue to be effective and the costs and risks to remain manageable. But as the program continues, we’ll be regularly updating those assessments.
If future evidence suggests the program’s effectiveness has declined or if potential unintended side effects or risks become apparent as the balance sheet grows, we will modify the program as appropriate.
More generally, the committee intends to be flexible in varying the pace of security purchases in response to information bearing on the outlook or at the perceived benefits and costs of the program.
Unlike the explicitly quantitative criteria associated with the committee’s forward guidance about the federal funds rate, which I’ll assess in a moment.
The criteria the committee will use to make decisions about the pace and extent of its asset purchase program are qualitative. In particular, a continuation of asset purchases are tied to our seeing substantial improvement in the outlook of the labor market. Because we expect to learn more over time about the efficacy and potential costs of asset purchases in the current economic context, we believe a qualitative guidance is more appropriate at this time.
In today’s statement, the committee also recasts its forward guidance to clarify how it expects its target for the federal funds rate to depend on future economic developments.
Specifically, the committee anticipates that its exceptionally low levels of the federal funds rate are likely to be warranted “as least as long as the unemployment rate remain above 6.5%.” Inflation over the period between more than 2 years ahead is projected to be no more than 0.5% above the committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well-anchored.
This formulation is a change from earlier statements in which forward guidance about the federal funds rate was expressed in terms of a date. For example, in the statements following the September and October meetings, the committee indicated that it anticipates that exceptionally low levels of federal funds rate are likely to be warranted “at least through mid-2015.”
The modified formulation makes more explicit the FOMC’s attention to maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability – a strategy that we believe will help support household and business confidence and spending.
By tying future monetary policy more explicitly to economic conditions, this formulation of our policy guidance should also make monetary policy more transparent and predictable to the public.
The change in the form of the committee’s forward guidance does not in itself imply any change in the committee’s expectation about the likely future path of the federal funds rate since the October meeting.
In particular, the committee expects the stated thresholds for employment will not be reached before mid-2015 and projects inflation will remain close to 2% over that period.
Thus, given the committee’s current outlook, the guidance introduced today is consistent with the committee’s earlier statements that exceptionally low levels of the federal funds rate are likely to be warranted at least through mid-2015.
Let me emphasize that the 6.5% threshold to the unemployment rate should not be interpreted as the committee’s longer-term objective for unemployment.
Indeed, the economic projections submitted in conjunction with today’s meeting, the central tendency of participants and estimates are the longer-run normal rate of unemployment is 5.2% to 6.0%.
However, because changes in monetary policy can affect the economy with a lag, the committee believes it likely will need to be moving away from a highly accommodative policy stance before the economy reaches maximum employment. Waiting until maximum employment is achieved before the process of removing policy accommodation, could lead to an undesirable over-shooting of potential output and compromise the FOMC’s longer-term inflation objective of 2%.
As the FOMC statement makes clear, the committee anticipates that policy under the new guidance will be fully consistent with continued progress against unemployment and with inflation remaining close to the committee’s 2% objective over the longer term.
Although the modified guidance should provide greater clarity about how the committee expects to respond to incoming data, it by no means puts monetary policy on autopilot. In this regard, let me make several points.
First, as the statement notes, the committee views its current low-rate policy as likely to be appropriate at least until the specified thresholds are met. Reaching one of those thresholds however will not automatically trigger immediate reduction in policy accommodation.
For example, if unemployment were to decline just slightly below 6.5% at a time when inflation expectations were subdued and were projected to remain so, the committee might judge that an immediate increase in its target for the federal funds rate to be inappropriate.
Ultimately, in deciding when and how quickly to reduce policy accommodation, the committee will follow a balanced approach in seeking to mitigate deviations of its longer-run 2% goal and deviations of employment from its estimated maximum level.
Second, the committee recognizes that no single indicator provides a complete assessment of the state of the labor market and therefore will consider changes in the unemployment rate within the broader context of labor market conditions.
For example, in evaluating a given decline in unemployment rate, the committee will also take into account the extent which that decline would be associated with increases in employment and hours worked as opposed to, say, increases in the number of discouraged workers and falling labor force participation.
The committee will also consider whether the improvement in the unemployment rate appears sustainable.
Third, the committee chose to express the inflations threshold in terms of projected inflation between 1 and 2 years ahead rather than in terms of current inflation. The committee took this approach to make clear that it intends to look through purely transitory fluctuations in inflation, such as those induced by short-term variations in the prices of internationally-traded commodities and to focus, instead, on the underlying inflation trend.
In making its collective judgement about underlying inflation trend, the committee will consider a variety of indicators, including measures such as median trimming and core inflation, the views of outside forecasters, and the predictions of the kind of metrics and statistical models of inflation.
Also, the committee will pay close attention to measures of inflation expectations to ensure that those expectations remain well-anchored.
Finally, the committee will continue to monitor a wide range of information on economic and financial developments to ensure that policy is conducted in a manner consistent with our dual mandate.
It’s worth noting that the goals of the FOMC’s asset purchases and of its federal funds rate guidance are somewhat different.
The goal of the asset purchase program is to increase the near-term momentum of the economy by fostering more accommodative financial conditions while the purpose of the rate guidance is to provide information about the future circumstances under which the committee would contemplate reducing accommodations.
I would emphasize that a decision by the committee to end asset purchases, whenever that point is reached, would not be a turn to tighter policy. While in that circumstance the committee would no longer be making increased policy accommodations, its policy stance would remain highly supportive of growth. Only at some later point would the committee begin to actually remove accommodations through rate increases.
Moreover, as I’ve discussed today, the decisions to modify the asset purchase program and to undertake rate increases are tied to different criteria.
In conclusion, the FOMC’s actions today are part of our ongoing efforts to support economic recovery and job creation while maintaining price stability. As I’ve often stressed, however, monetary policy has its limits. Only the private and public sectors working together can get the U.S. economy fully back on track.
In particular, it will be critical that fiscal policymakers come together soon to achieve longer-term fiscal sustainability without adopting policies that could derail the ongoing recovery.
Thank you. I’d be happy to answer your questions.
- WhatTheFolly.com: Federal Reserve will keep interest rates at historic low until unemployment rate drops to 6.5%
- FederalReserve.gov: Federal Reserve issues FOMC statement
- FederalReserve.gov: Federal Reserve Board and Federal Open Market Committee release economic projections from the December 11-12 FOMC meeting
- NewYorkFed.org: Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities
- YouTube.com/FedReserveBoard: Press Conference with FOMC Chairman Ben S. Bernanke