Bernanke Press Conference Highlights

December 12, 2012

Several questions were directed at the fiscal cliff, a term first suggested by Bernanke.  He felt the metaphor was still good and didn’t support the position of some that if a deal can be reached a couple of weeks into 2013 that the damaging effect would be only slight.  He reiterated that the Fed doesn’t have the tools to neutralize the drag of the fiscal cliff but implied that the central bank would respond with additional stimulus.  Another point made is that the possibility of not avoiding a fiscal cliff is already harming the economy.  It is equally important for lawmakers to establish a framework that fixes long-term fiscal policy excesses and one that doesn’t depress the economy now.

A considerably more aggressive monetary stimulus was introduced after the September FOMC meeting.  Today’s actions can be characterized as follow-through implementation of what was unveiled in principle back then. 

To those who wonder why the Fed isn’t promoting growth more forcefully in spite of a considerable unemployment overshoot and the staffing view that inflation will be at or below target in spite of what is being done, Bernanke indicated that less is know about the trade-off of costs and benefits of quantitative easing than more orthodox policymaking when just the interest rate is moved.

Bernanke denied the notion that quantitative easing (QE) at a time of heavy deficit spending by Washington constitutes accommodation of fiscal borrowing.  Almost four years have passed since the start of QE without inflation accelerating, and the Fed’s models do not indicate inflation exceeding target for another three years.  The ratio of Fed Treasury holdings to total outstanding Treasury debt hasn’t risen.

Bernanke said the two mandates of the Fed of promoting labor market health and price stability have equal weight in guiding policy.

Bernanke endorsed a view of eventual interest rate normalization that is gradual in slope rather than steeply inclined.

A new summary of the FOMC’s economic projections was provided.  On the GDP ranges, the floor was lowered for 2013, and the ceiling was reduced for 2014.  Bernanke conceded a systematic tendency to over-project U.S. growth since the current expansion phase began in mid-2009.  Unemployment has a range that doesn’t include 6.0% until 2015.  Core PCE inflation could be as low as 1.6% even in 2014 and is not expected to exceed the 2.0% target even in 2015.  13 of 19 FOMC members think the most appropriate time to implement an initial fed funds rate increase will be in 2015.  Only 3 believe 2014 would be appropriate.  One puts the best time in 2016, and two chose next year.

U.S. equities were lower at the end of the press conference than at the start. 

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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