WASHINGTON - Federal Reserve Chairman Ben Bernanke left no doubt Wednesday that he and a majority of his fellow policymakers are prepared to resort to more quantitative easing under certain circumstances -- possibly even if inflation is running above the Fed's newly announced 2% target.
Bernanke defended the Federal Open Market Committee's decision to extend until at least late 2014 the period of "exceptionally low" short-term interest rates and went further in a post-FOMC press conference to assert that the Fed is prepared to do more asset purchases to hold down long-term rates if the pace of economic growth and job gains is deemed unsatisfactory and inflation remains low.
Bernanke said that, unlike the European Central Bank and other central banks with an inflation target, the Fed will give equal weight to the two aspects of its statutory dual mandate -- price stability and maximum employment.
But the Fed chief didn't rule out further stimulus measures in a situation where inflation was running above target, but unemployment was still too high, suggesting the Fed could afford to take its time bringing inflation back to target if unemployment was running well above what the Fed regards as its "longer run" level of 5.2% to 6.0%.
He took questions from reporters after FOMC participants' federal funds rate projections were released for the first time. Eleven of 17 Fed governors and presidents projected the rate hikes coming in 2014 at the earliest. Four expect no rate hike until 2015, and two expect rate hikes to be delayed until 2016.By the end of 2014, 11 expect the funds rate to be 1% or lower with six anticipating that the rate will remain near zero.
Bernanke emphasized the funds rate forecasts are "conditional" on evolving economic conditions and subject to change. And, in response to MNI, he said it was still important for the 10 actual FOMC voters to continue to provide "forward guidance" on the likely path of the funds rate.
In its policy statement, the FOMC said it "decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
The committee had previously said it expected to keep the funds rate that low 'til at least mid-2013.
In case that wasn't clear enough, the FOMC said it "expects to maintain a highly accommodative stance for monetary policy."
That "highly accommodative stance" could include not just the prolongation of zero rates but also further expansion of the balance sheet, Bernanke made clear.
At a minimum, he said, shrinkage of the balance sheet is apt to be delayed along with the timing of funds rate hikes.
"One implication of our extension of our expected point of takeoff to late 2014, is to imply that the initial sales from our balance sheets, which again are far down the road, ... will be later than previously thought," he said. "That will be presumably in 2015. And so we do expect to hold our balance sheet at a high level for a longer period.
Bernanke said "additional purchases remains a topic that we are still debating and it will depend both on our assessment of the efficacy and risks of that particular tool."
But repeatedly, he indicated an openness to doing more quantitative easing.
In an opening statement, Bernanke said, "the committee recognizes that hardships imposed by high and persistent unemployment and under performing economy, and it is prepared to provide further monetary accommodation if employment is not making sufficient progress towards assessment of maximum level or inflation shows signs of moving below the mandated consistent rate."
And he was more explicit about expanding the Fed's $2.9 trillion balance sheet in response to questions.
"We continue to review ... our portfolio holdings, securities, and we are prepared to take further steps in that direction if we see that the recovery is faltering or inflation is not moving towards target," he said when asked about the prospects for more quantitative easing. "So, that's ... an option on the table."
"I think it would be premature to say definitively one way or the other but we continue to look at that option and if conditions warrant we will certainly consider using it," he added.
Bernanke acknowledged the Fed has "been very accommodative in the last couple of years" and said the Fed has not been "passive" in the face of a subpar recovery. He cited the three years of keeping the funds rate near zero, two rounds of quantitative easing, the maturity extension program and the announced plan to delay rate hikes until at least late 2014.
He emphasized that the FOMC is "not going to mechanically take the interest rate projections that participants provide and just build policy off of that. ... It's still going to be necessary for the Committee to exercise collective judgment and to consider cost and risks of additional policy actions and to discussion the uncertainty about the forecast and other factors that come into the policy decision."
But Bernanke said "if inflation is going to remain below target for extended period and unemployment progress is very slow, then I think ... there is a case for additional policy action."
He added that, "We want to continue to observe the situation, but we're prepared to look for different ways to provide support for the economy if in fact we have this unsatisfactory situation."
"Expanding the balance sheet certainly remains an option -- one that we would consider very seriously if, in particular, progress towards full employment ... became more inadequate or if inflation remained exceptionally low," he told another reporter. "So we'll continue to look at that ... . We're prepared to take additional measures in general and that (asset purchases) would be certainly one class of measures we would want to consider."
Bernanke was willing to consider easing despite what he conceded were "good data recently," given the "uncertainty about where the economy is going ... .
"We want to continue to observe how the economy's developing," he said. "But I would say ... if recovery continues to be modest and progress on unemployment very slow, and if inflation appears to be likely to be below target for a number of years out ... then I think there would be a very strong case based on our framework for finding additional tools for expansionary policies to support the economy."
"So we'll continue to look at the different options and try to decide what might be most effective," he said.
Bernanke said the Fed is "in a difficult situation in terms of effectiveness of policy tools," saying that problems in the housing market" have impeded the "monetary transmission mechanism."
In an addendum to its regular policy statement, the FOMC enunciated its "longer-run goals and policy strategy," in which it said it is "firmly committed" to fulfilling both its maximum employment and price stability mandates. In that statement, the FOMC for the first time enunciated an explicit numerical inflation goal, which Bernanke referred to as a "target," of 2% as measured by the price index for personal consumption expenditures (PCE).
Bernanke said "maximum employment stands on equal footing with price stability as an objective monetary policy," but he hedged a bit in talking about the timing of meeting those two objectives, leaving open the possibility of running a very stimulative monetary policy in spite of above-target inflation.
Asked whether he was willing to tolerate inflation higher than the 2% target, Bernanke replied, "We treat them symmetrically," but "we cannot control, of course, where inflation and unemployment are at each moment in time."
"There will be periods when, for reasons out of our control, inflation and unemployment will move away from their desired levels," Bernanke continued. "If in those situations, the speed at which -- I think 'tolerate' might be too strong of a word because we always want to get both sides of the mandate back to their desired levels -- but, the speed at which we would enforce that return would depend on what's happening with the other variable."
"So, for example, if inflation did go above target by modest amount, we would certainly try to get it back down to target," he went on. "But if unemployment were very high, that would lead us to be more cautious and slower in returning to target."
MNI asked Bernanke why the FOMC kept forward guidance language in its policy statement instead of letting the new funds rate forecasts speak for themselves -- something Richmond Fed President Jeffrey Lacker preferred in dissenting against the revised policy statement.
Bernanke began his reply by saying that one of the Fed's "two main tools" to stimulate the economy at the zero lower bound for the funds rate is to "communicate that rates will be lower for longer. That will ease financial conditions and be a way that we can affect the state of the economy."
He said "the reason that we just don't release the economic projections and leave it at that, is because while the economic projections of future policy rates are an important input to our policy discussions, around the table, the decision ultimately is made by the Federal Open Market Committee, you know, which is the voters, sitting around the table, and in the process by which we exchange ideas and make arguments and come to collective determination."
"So we don't set the federal funds interest rate by having members send in their vote and not having a meeting," he said. "We have a meeting for a reason, which is to talk to each other and try to come to some kind of consensus."
"So the FOMC will always in some sense trump the projections of forward interest rates, but clearly because the participants and people around the table are the same, the projections should give significant information about where the FOMC is likely to go," he added.
Bernanke was also asked whether there is a danger that delaying the projected funds rate lift-off date sends a pessimistic signal to the public and financial markets.
He replied that there's a potential for sending such a signal "whenever the Fed takes policy action," and he said the Fed has to take that into consideration. But he said, that "generally speaking, those considerations are outweighed by the need to maintain accommodative financial conditions so that it's attractive to firms to invest and hire and attractive for those who are eligible to buy homes, and so on. And I think that that, ultimately, is more powerful than the signal from the change in policy."
"I wouldn't overstate the Fed's ability to massively change expectations through its statements," he continued, adding, "it's important for us to provide the right amount of stimulus to help our economy recover from its currently underutilized condition."
Bernanke said the FOMC held a discussion about the balance sheet and said the minutes of the meeting will include a "qualitative" information about the balance sheet.
"The reason that I cannot provide all of that information now is basically that we received ... a whole range of qualitative comments, and we had further discussion during the meeting yesterday and today, and so, we need a little time to summarize that...."
After all FOMC participants approve the minutes, he promised "a definitive statement of what we currently know about the balance sheet."
Bernanke reiterated that "expanding the balance sheet certainly remains an option." Beyond that, he recalled that the minutes of the June 2011 meeting included a statement of principles for the eventual exit strategy and said those "remain in force."
For the first time all 17 FOMC participants incorporated projections of the federal funds rate (and the timing of rate hikes) with their economic forecasts in the Summary of Economic Projections (SEP), and Bernanke sought to explain their purpose in his opening statement.
"That is the path of policy that each participant judges as most likely to foster mandate outcomes for employment and inflation if the economy evolves as expected," he said. "These judgments of our future policy underlie projections of growth, unemployment and inflation.
"Importantly, these policy assessments should not be viewed as unconditional pledges," he stressed. "Rather, just as with our economic projections, these policy projections reflect the information available at the time of the forecast and are subject to future revision in light of evolving economic and financial conditions."
"Based on current information, 11 participants expect that the appropriate federal funds rate at the end of 2014 will be at or below 1% while six participants and higher rates at that time," Bernanke noted. "In effect, those judgments are reflected in today's meeting statement in which the committee indicated that economic conditions are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014."
Bernanke conceded that the FOMC's ability to forecast either the economy or the appropriate path of monetary policy is imperfect, but said it must still make the effort and be prepared to revise its projections if necessary.
"Nevertheless, we have to make a best guess," he said. "It's certainly possible that we will be either too optimistic for too pessimistic in which case we'll have to adjust both our forecasts and policy expectations."
"That being said ... the zero lower bound on policy rates, at least according to many estimates, is still binding," he said. "That is, even in the economy were a bit stronger, the very low interest rates we currently have would still be valid, still be appropriate."
"And so for that reason, unless there's a substantial strengthening of the economy in the near-term, I would think that it's a pretty good guess that we will be keeping rates low for some time from now," he added.
Bernanke emphasized that "there's no mechanical relationship between these projections and the outcomes of FOMC decisions."
"Of course they're a big input into the decisions but it's collective decision," he said, suggesting that reporters "look at the median, the middle of the distribution (of funds rate forecasts), because we do have a democratic process in the committee. And so the median would give you a sense of where the weight balances against higher in favor of higher or lower rates."
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