Fed Chairman Talks Off-The-Cuff

2nd Ever Post FOMC News Conference, June 22, 2011

You can read the FOMC Statement and Projections for an overview of the FOMC decision (rates unchanged, exceptionally low rate for an extended period, reinvest proceeds from maturing proceeds etc) and the outlook. I have simply summarized the off-the-cuff remarks made by the Federal Reserve Chairman in the Q&A following the prepared remarks. He spoke for about 55 minutes in all. It seemed to be roughly the same line-up of news organisations called upon to ask questions. The traditional financial media (WSJ, Economist, FT etc), establishment news (Washington Post, NY Times), CNBC, the wires (Reuters, Bloomberg, AP) and one or two randoms. No independents, bloggers, academics. Be far more interesting with a wider range of participants…we might actually get an original question.

1. WSJ

Question: Does FOMC’s guidance ‘exceptionally low interest rates for an extended period’ also apply for Treasury holdings (i.e. large securities positions). 

Answer: No. The Fed considered giving guidance on this tool but at this point has not taken that step. 

 2. The Economist

Question: GDP forecast revisions are attributed to temporary factors. Are there more permanent factors contributing to this decline?

Answer: FOMC believes mostly temporary factors are driving these revisions however there is a likely 2012 pick-up in economic activity (slower than forecast in April). Some of the concerning headwinds e.g. financial sector and housing weakness, balance sheet and deleveraging etc, may be more permanent than thought – which are impacting the recovery. 


Question: To what extent was Greece and Europe discussed in the meeting? Was there a discussion about further easing?

Answer: Greece is important/ a challenging situation. In close collaboration with European colleagues (a G7 call over the weekend). The Europeans appreciate the importance of resolving the Greek situation. A failure to resolve this would affect the European system/ community and currency. Keeping on top of the situation but not directly affecting decision making. No decision taken on further securities purchases at this time. 

4. Dow Jones

Question: Would Budget cuts at the end of the year, help or hinder the economy. 

Answer: The effect of fiscal cuts depends upon the timing. Taking a long run perspective can help the economy as eg interest rates may rise in the short term. In focusing on the longer term …. [audio cut out and transmission lost for 90 seconds]. 

5. PBS

Question: Growing view that the deficit is the problem with jobs and cutting the deficit would improve the outlook.

Answer: Sharp, immediate cuts in the deficit would not create more jobs. We are already seeing fiscal drag from state and local government cuts as well as the run-off of federal stimulus. People should understand that budgetary problems are long-run in nature. The sooner we can act the better. The most efficient and effective way to solve our problems is to take a long-run approach and implement a credible long term plan – this will keep rates lower and confidence higher. Focusing on the short term is not optimal.

6. Washington Post

Question: Do you believe the FOMC has the authority to set an inflation target? If not have you considered seeking authority from Congress?

Answer: Believes in having an inflation target but there are multiple models and the current model provides even greater flexibility. Does not see a real barrier to setting a target however believes it is very important to first communicate to the public what we are doing. Would want to ensure the public and Congress understand the employment target is not being dropped. Definitely need Congress and Administration’s buy-in even if have legislative authority to set a target. 

7. NY Times

Question: What is the impact on the U.S. economy of a Euro sovereign default a

Answer: Have closely analysed exposure of regulated banks to peripheral Euro sovereigns – there is not significant direct exposure (indirectly it does however come through exposure to the core banks which fund the periphery). Fed has developed stress tests based on bank capital levels etc from defaults. Fed has also closely reviewed money market mutual funds but again they don’t have significant direct exposure (they are however exposed significantly through holdings of debt issued by core Euro banks). 

8. American Banker

Question: Please comment on proposed surcharges on systemically important firms.

Answer: The failure of large financial institutions was a large contributor to the financial crisis. Regulating capital (higher/ better quality capital) is a critical part of responding to future crises. The Fed is negotiating with global regulators on appropriate capital levels for systemically important firms. 

9. Financial Times

Question: Comment on the outlook for core inflation, long run unemployment and the output gap.

Answer: Some of the factors driving core inflation are clearly temporary (e.g Japanese crisis has caused a spike in auto prices + contributors to energy prices like jet fuel are part of core even though energy is excluded). The FOMC sees the long run unemployment rate (NAIRU) somewhere around 5.5%. The FOMC thus continues to believe the output gap is large. 

10. Fox Business

Question: What is the extended period for the exceptionally low Fed Funds Rate? Under what conditions would this period be extended even longer.

Answer: The language is vague because the FOMC does not have a definitive period in mind. At least 2-3 meetings away. I emphasise ‘at least’. Conditions such as improved job creation and inflation crates loser or above the mandate consisted level may lead us to commence the exit process – but we are not there yet. 

11. Bloomberg

Question: What would your policy be to get to best possible GDP rate?

Answer: No alternative but to look at incoming data when forecasting the economy. 

12. Unclear 

Question: Where do you fit in the central tendency of the FOMC projections? What are the benefits of having your own outlook? Could you comment on your predecessor’s comment that we should revert to Clinton era taxes.

Answer: As a member of the FOMC I have submitted my own forecasts. I am generally consistent with most of my colleagues – not a maverick. We seriously need a long run plan to address the fiscal situation – this is the responsibility of Congress – I do not want to wade into tax and spending policy. 

13. BBC News

Question: Expect weak growth going forward and a return to higher growth in the long run. 

Answer: We expect growth in the second half of 2011 and 2012 to be higher and healthier payroll numbers. Given growth is not much above the long run potential rate of growth (2.5-2.8%) we project unemployment to come down painfully slowly. Growth needs to pick up higher than the long run rate to bring unemployment down. 

14. Reuters

Question: Why is the Fed not considering more easing? How would you implement?

Answer: Current outlook is significantly different from August 2010. We no longer have a deflationary risk. Notwithstanding bad news the labour market is performing better than last year. We have a lot of uncertainty regarding how temporary and how permanent the slow down is. As projections and data comes in and changes we will balance the need to potentially acquire more securities, cut excess reserves held by banks, give guidance on the balance sheet, or giving a fixed date to define extended period. These are untested tools which have their own costs. We would be prepared to take additional action if conditions warranted. 

15. Japanese News

Question: Hard to understand the question – related to considering the relevance of the Japanese experience to the U.S. Specific reference to remarks made by President Bernanke 2001/02 regarding deflation in Japan.

Answer: Summarized remarks made in 2001/02. Securities purchases made by the Fed over previous few years have succeeded in combating deflationary risk and have had a positive impact on jobs. 

16. Unclear

Question: Is there a statistical level at which point to commence the exit process?

Answer: Impossible to create a statistical level – there are 17/18 independent members of the FOMC – each with their own views. We look at a range of statistics.

17. Associated Press

Question: November 2010 you mentioned that a second round of asset purchases would ease mortgage rates and reduce housing prices. We are seeing weak fundamentals still and an unlikely rebound until 2013 and 2014. What can be done to stimulate growth?

Answer: Housing is very important to the recovery. We did reduce mortgage rates and their are lower prices. Problems include tightening credit standards for mortgages. The bottom third who may have qualified for a prime mortgage a few years ago are no longer able to borrow. Continuing uncertainty also impacts the decision making process for potential buyers. The Fed is trying to address this through monetary policy (stimulate income and employment), improving servicing practices and working with regulated banks. Federal Reserve has also given significant guidance to other government agencies and I am chair of TARP committee so stay abreast of developments. Housing prices are falling but it is concentrated in distressed properties which suggests if we can do something here we can stabilise prices and improve confidence. 

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