WASHINGTON—In a historic first news briefing from the U.S. Federal Reserve, Chairman Ben Bernanke gave some much-needed color to talk of inflation and interest rates—and then threw in some advice for Congress on the budget debate for good measure.
Financial markets are fiercely susceptible to speculation, and so the Federal Reserve has always carefully controlled communication about its decisions. Since taking office in 2006, Bernanke has been on a mission to change that. In advance of his first-ever open meeting with the press, an internal committee finally concluded that the benefits outweighed the risks.
“I personally have always been a big believer in providing as much information as you can to help the public understand what you are doing, to help the markets understand what you are doing, to be accountable to the public for what you are doing,” Bernanke said at the April 27 briefing.
The Fed is the central bank of the United States. Its primary purpose is to control monetary policy in a way that minimizes inflation while growing the economy.
Bernanke’s press conference came on the heels of the most recent two-day meeting of the Federal Open Market Committee (FOMC), which consists of 7 members of a board of governors and 5 of the 12 regional Reserve Bank presidents. The FOMC meets eight times per year to review policies.
In a statement released today, the Fed concluded that “the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.”
Inflation has picked up slightly in the last quarter due to increased gas and food prices, but the Fed’s position is that inflation will continue to stay relatively low. They are closely watching inflation expectations in the medium term, which can be affected by factors such as volatile gas prices.
The Fed is expecting that gas prices will stabilize or decline as instability in the Middle East calms down. At the same time, they are not ruling out further action should something unexpected cause inflation to go up, Bernanke said.
“I think that every central banker understands that keeping inflation low and stable is absolutely essential to a successful economy and we will do what is necessary to ensure that that happens,” Bernanke said.
News of a slower than anticipated first quarter GDP growth rate is expected to be released on April 28.
Bernanke confirmed that it will likely be less than 2 percent. He referred to lower defense spending, weaker exports, continued weak construction rates, and “less momentum” than originally projected as the causes for the recent slowdown.
Responding to criticism that the Fed’s policies had not done enough to improve the economy, Bernanke said the Federal Reserve had used “extraordinary measures” to control the financial crisis, but said these actions were never meant to be a panacea.
The most extraordinary of these measures taken by the Fed, were two somewhat controversial rounds of quantitive easing, dubbed QE1 and QE2. The first round of long-term securities purchases started in March of 2009, and the second round of $600 billion is scheduled to end in June of this year.
Some analysts have expressed trepidation about what will happen when the Fed stops pumping money into the economy.
Bernanke sought to allay those concerns today. First, he said that the markets have enough notice now of the date, and will act in advance to capitalize on it.
Second, he said it is more important that the Fed plans to maintain its balance sheet by reinvesting securities as they mature, instead of selling them off.
The Fed is currently holding a record $2.65 trillion, up from $870 billion in December of 2007.
Bernanke said when they do start selling them—likely not for at least another two quarters—there will be a tightening of financial conditions.
“We will base that decision on the evolving outlook,” said Bernanke.
Words for Congress
The chairman’s ability to control the economy clearly has its limits. Bernanke expressed today that he believes Congress and the administration must make the nation’s debt and fiscal crisis their top priority.
“I have not seen any fiscal changes that have really changed our long term outcome,” he said.
“We currently have a fiscal deficit, which is simply not sustainable over the longer term, and if it is not addressed it will have significant consequences for financial stability, for economic growth, for our standard of living,” Bernanke said.
He even went as far as saying that a downgrade last week by Standard and Poor of U.S. debt could be a good thing if it prompts the government to act.
“It is a long-term problem. If Congress and the administration are able to make credible commitments to cutting programs, or in any way changing the fiscal profile going forward for a long period of time, that is the most constructive way to address what is in fact a long run problem,” Bernanke said.
He also suggested that the slow recovery could be due in part to the fact that the government’s policy responses were not adequate from the beginning.
Bernanke repeated concerns he has expressed in the past about the long-term unemployment rate. When people are out of a job for longer than six months, their skills atrophy, they loose industry contacts and they get discouraged, he said.
“Long-term unemployment in the current economy is really the worst that it has been in the postwar period,” he said.
“Conditions are far from where we would like them to be. The combination of high unemployment, high gas prices, and high foreclosure rates is a terrible combination, and a lot of people are having a very tough time.
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