Market Overview

Bernanke: The Fed Has Done a Lot


Following the FOMC rate decision, the Federal Reserve's Chairman Ben Bernanke gave a press conference.

Bernanke stated that the Fed believes that the economy is expanding moderately. Most Fed members believe that growth will remain moderate and then pickup gradually. Bernanke stated that housing remains a headwind. He stated that strains in this sector continue to pose significant risk to the outlook. Bernanke stated that the unemployment rate remains elevated. Looking ahead, Bernanke predicted that inflation will decline gradually in the coming years. Bernanke stated that the FOMC projects 7.8-8% unemployment for the fourth quarter this year. Generally, 5.2-6% is seen as a standard unemployment rate.

Bernanke stated that the committee expects recent inflation, due to energy prices, to be temporary. Bernanke stated that the Fed anticipates that inflation will run at or below longer-run goal of 2%. Many participants have a range of views about when the initial increase is likely to be appropriate.

Bernanke stated that the Fed has been bold and aggressive in terms of easy money policy. Bernanke said that the Fed has done much including two QE2s, operation twist and longer-term guidance. Overall, he stated that the Fed has been very accommodative and remains prepared to do more if needed.

"We will not hesitate to use tools if economy requires additional support," Bernanke stated.

Core inflation has been slightly stronger than expected, he admitted. Yet, Bernanke stated that some of the movements have come from transitory sources. The recent rise in gasoline has created what Bernanke termed "a bulge," which will pass through assuming no more oil shocks. Bernanke predicted Inflation will moderate to 2% by the end of the year.

Bernanke stated that forward guidance on Federal Funds rate is conditional on data, and if the data were to come in much stronger, the Fed would adjust future guidance and respond.

"If there is a substantial change in the economic outlook in either direction, the guidance will change," Bernanke explained. He added that the committee is continuing to work toward increasing transparency.

When asked about the recent chatter that Bernanke's views on the actions of the Bank of Japan are inconsistent with his current views, Bernanke strongly disagreed.

"(The) views are completely consistent. I believe that a determined central bank could and should eliminate deflation. When short-term interest rates hit zero, the tools of a central bank are not exhausted," Bernanke said.

Yet, according to Bernanke, the US is not in deflation. Japan was in deflation 15 years ago and recession. The US is not in deflation, and the inflation rate is close to the Fed's objective.

Bernanke was asked, why not do more? Bernanke stated that the committee believes that going over the inflation target to reduce employment would be reckless. Risking the Fed's credibility for doubtful real gains would be unwise according to Bernanke.

The Federal Reserve would not have the ability to offset the coming fiscal cliff. Bernanke stated that Congress must achieve long-term sustainability but, at the same time, not endanger short-term recovery. Bernanke stated that he was concerned that if Congress does not act, it would be a significant risk to the recovery.

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