The Federal Reserve will successfully meet the "difficult challenges" it will face in the coming years, Federal Reserve Board Chairman Ben Bernake told the American Economic Association Friday.
"Although the Fed undoubtedly will face some difficult challenges in the years ahead, our people and our values make me confident that our institution will meet those challenges successfully," Bernanke said, according to prepared text released by the Fed.
The Federal Open Market Committee's decision to "modestly reduce" the amount of its asset purchases, he said, "did not indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed; rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012."
Although skeptics have noted the recovery has been slow, Bernanke said that was a result of powerful headwinds, and without the Fed's moves "economic growth might well have been considerably weaker, or even negative."
"For the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases has helped promote the recovery," he said. "For example, changes in guidance appear to shift interest rate expectations, and the preponderance of studies show that asset purchases push down longer-term interest rates and boost asset prices."
The challenge, Bernanke said, will be when the "unconventional tools" are not needed and the FOMC "will face issues of policy implementation and, ultimately, the design of the policy framework."
But, he said, the Fed "now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates; in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the FOMC will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate."
