Photo: Bloomberg Television
Ben Bernanke gave a speech Monday afternoon at the University of Michigan’s Ford School of Public Policy, followed by a Q&A.In addition to questions from the audience, Bernanke took questions from Twitter via the hashtag #FordSchoolBernanke.
Below is our liveblog of the event:
University of Michigan staff have taken the podium to introduce Bernanke.
Bernanke is now taking the stage.
Bernanke says there are two big fiscal issues we need to think about. The first is the long-term sustainability of our debt.
Bernanke said the second issue in some ways sounds contradictory to the first: we want to avoid fiscal actions that will push the economy back into recession. Bernanke cites the “fiscal cliff” as an example.
Bernanke says the “fiscal cliff” deal that was struck made “some progress” toward the first issue. It also made a “good start” on removing components that would harm the economy.
Bernanke: “I should hasten to say we are not out of the woods.”
Bernanke says not everyone understands what the debt ceiling is about. He clarifies that raising the debt ceiling gives the government the ability to pay existing bills – not authorise future spending.
Bernanke says if the U.S. were allowed to go over the fiscal cliff, it probably would have caused a recession this year. That risk has been curbed a bit with the recent “fiscal cliff” deal.
Bernanke says the Fed has succeeded through quantitative easing in bringing long-term interest rates down, and it reduced mortgage rates to a “credibly low” level.
Bernanke says the Fed will first look at the impact on financial markets in assessing the impact of the Fed’s actions – also, whether the labour market situation is improving.
Bernanke says he sees some “modest improvement” in the labour market, but is looking for a stronger labour market, with broader improvement.
Bernanke says the pace of growth has not been as strong as you would normally think would be needed to get improvements in the labour market, but nevertheless, the unemployment rate has fallen from around 10 per cent to 7.8 per cent.
Bernanke says “there’s no completely new method” of monetary policy the Fed hasn’t explored and says asset purchases and communications policies are the two main tools at the Fed’s disposal.
Bernanke says state and local governments – which have been in contractionary mode since the crisis – are looking stronger than they did before and will no longer be a drag on the economy.
Bernanke says the U.S. energy industry is looking stronger as well.
Bernanke says the University of Michigan Consumer Sentiment indicator is one of the “very best guides” to how the consumer is feeling.
Bernanke says the inflation rate is very low and appears to be on track to stay below 2 per cent. Unemployment is still very high but has been coming down slowly. High unemployment motivates and justifies the Fed’s current monetary policies.
Bernanke says he doesn’t see much evidence of inflation from Fed monetary policy. He believes the Fed has all of the tools it needs to unwind stimulus before inflation becomes a problem.
Bernanke says financial stability risks arising from Fed policies are “a difficult issue.” However, the Fed has tried to shore things up by increasing capital held by banks, making derivatives markets more transparent, etc.
Bernanke says as the Fed evaluates its policies, it looks at benefits as well as risks. It wants to make sure its actions are justified in a “cost-benefit” framework.
Bernanke says raising interest rates would increase budget deficits, making fiscal problems all the more difficult – therefore, raising rates wouldn’t be sensible action to get Congress going on budget negotiations.
Bernanke says one lesson from the Great Depression is to not let monetary policy get too tight.
Bernanke says global growth has been slower partly because of the euro crisis. Also, the slowdown in China was partly a policy goal aimed at rebalancing the Chinese economy.
Bernanke says U.S. export data have been “pretty weak” recently.
Here come questions from the audience.
The first question, of course, is about the trillion dollar coin. Bernanke says, “we didn’t think this was the right way to deal with this problem…I don’t think that going off in that other direction would be all that helpful.”
Bernanke says the debt ceiling has “symbolic value.” Essentially no other countries have it.
Bernanke says asset bubbles are very, very difficult to anticipate, but the Fed can try to strengthen the financial system by increasing the amount of capital and liquidity that banks hold, by increasing supervision of banks, by making sure every financial institution is at least supervised by somebody.
Bernanke says there is a lot of disagreement in monetary policy’s role in creating asset bubbles. Bernanke says the Fed’s attitude is that they need to be open-minded about it. Bernanke says that the Fed was created in 1913 not to conduct monetary policy but to prevent financial panics.
Bernanke takes the first Twitter question. Why does the Fed continue to “undershoot” its inflation target?
Bernanke says that the short-term interest rate is close to zero, and that the Fed is now in the world of nonstandard policies. The Fed has to pay very close attention to the costs and risks of these policies.
Bernanke says inflation is close to the target and adds that “it’s not radically far from the target.”
Bernanke says a better way to communicate interest rate guidance than providing a projected calendar date for policy shifts is quantitative thresholds, like the ones the Fed adopted in December.
Bernanke says the main benefit is that it allows greater clarity on how policy will evolve given changes to the economic outlook.
Bernanke says the main area of financial reform that has been neglected is that of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.
Bernanke says the trouble with “Audit the Fed” is that that is not what it’s about. The Fed’s books are audited by an outside, private-sector accounting firm. Furthermore, the Fed’s books are open to the Goverment Accountability Office, and the central bank has an independent inspector general.
However, Bernanke says there is one exception. The GAO cannot audit monetary policy decisions. The “Audit the Fed” bill would undo that provision. Bernanke says investigation of why the Fed chooses particular monetary policies by Congress would be the first step toward the Fed giving up independence in monetary policymaking.
Bernanke says auditing the Fed has “nothing to do with the financials,” but is politically driven.
Bernanke says he reads blogs and that the medium has become pretty important for intellectual exchange.
That concludes the Q&A.
ORIGINAL: Minutes away from the release of a new speech by Federal Reserve Chairman Ben Bernanke at 4 PM ET at the University of Michigan’s Ford School of Public Policy.
The Ford School’s website describes the event as a “conversation…on monetary policy, recovery from the global financial crisis, and long-term challenges facing the U.S. economy.”
Bernanke will take questions from the audience and from Twitter via the hashtag #FordSchoolBernanke.
Given the market’s recent uncertainty surrounding when the Federal Reserve may move to slow or halt bond buying under its quantitative easing program, Bernanke’s words will be closely parsed for anything that may clarify the outlook.
Société Générale economist Michala Marcussen wrote in a note to clients this morning, “Favourable data will keep the debate on when the Fed will end asset purchases top of the list of market issues (next FOMC on 29-30 January). We expect Chairman Bernanke, speaking Monday, to reiterate the need for the Fed to keep its foot on the accelerator for now. Our central scenario sees QE continue into late 2013.”
Note: A live webcast of the event can be viewed on the Ford School’s website.
We will have LIVE coverage beginning at 4 PM ET. Click here for updates >