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Bernanke on U.S. recovery, Federal Reserve policy

By Neil Irwin
Washington Post Staff Writer
Monday, October 25, 2010; 9:44 PM

Ben Bernanke doesn't do press conferences. Nor, with rare exceptions, does the Federal Reserve chairman sit for on-the-record interviews. But that doesn't mean that there's no chance to know what Bernanke is thinking. He may not have taken questions from the news media lately, but he has given public remarks six times in the past month, including submitting to questioning by Rhode Island college students, economics teachers from around the country, and businesspeople in Pittsburgh.

With the economic recovery stumbling and all eyes on the Fed in advance of a crucial meeting of its policymaking committee next week, we wanted to do a Q&A with Bernanke despite his press-shy tendencies. In response to requests for an on-the-record interview about the economy or monetary policy, Fed spokespeople invariably direct reporters to the chairman's recent public statements - as a spokeswoman did Monday in a request for this item. So here's our Q&A. The questions are ours, the answers are gleaned from Bernanke's recent speeches and other public appearances.

The Washington Post: So how's the economy doing?

Bernanke: Overall economic growth has been proceeding at a pace that is less vigorous than we would like. . . . Although output growth should be somewhat stronger in 2011 than it has been recently, growth next year seems unlikely to be much above its longer-term trend . . . implying that the unemployment rate will decline only slowly. (1)

Q: We're more than a year into what is technically an economic recovery, yet conditions still feel miserable. Why?

A: We avoided what could have been a global meltdown. . . . But even so, we got a taste of how powerful a financial crisis is on real activity. That blow which knocked the world economy into a deep recession in the second half of '08 and early '09, we are only recovering from that at a pace slower than we would like. (2)

Q: That doesn't sound very good. So are you guys going to do anything about it?

A: There would appear - all else being equal - to be a case for further action. . . . Further policy accommodation is certainly possible even with the overnight interest rate at zero, but nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used. . . . The [Federal Open Market Committee] is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. (1)

Q: What do you mean, inflation levels consistent with your mandate? Doesn't the Fed always try to get inflation lower?

A: FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below. . . . Recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running rates that are too low relative to the levels that the committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run. (1)

Q: All right, so you want to get inflation higher, and speed up the pace of growth. How will you do it? As you say, you've already cut your normal interest rate target to zero. What are these "nonconventional policies" you're talking about?

A: A means of providing additional monetary stimulus, if warranted, would be to expand the Federal Reserve's holdings of longer-term securities. . . . Our previous program of securities purchases was successful in bringing down longer-term interest rates and thereby supporting the economic recovery. (1) Additional purchases have the ability to ease financial conditions. (3)

Q: So you could buy bonds to try to push down mortgage and other interest rates. Doesn't that have risks?

A: One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument. . . . Another concern . . . is that substantial further expansion of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. (1)

Q: There seems to be a lot of disagreement within the Fed over this; some seem opposed to new bond purchases. Should a divided Fed worry us?

A: There is disagreement, but ultimately the committee finds a consensus and we work together to figure out what the right thing is for the country. . . . Disagreement is a good thing. It creates new ideas. It forces people to look at all sides of the question. (4)

Q: These foreclosure problems seem like kind of a big deal. What is the Fed doing about it?

A:The federal banking agencies are working together to complete an in-depth review of practices at the largest mortgage servicing operations. We are looking intensively at the firms' policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures. . . . We anticipate preliminary results of the review next month. (5)

(1)"Monetary Policy Objectives and Tools in a Low-Inflation Environment," Oct. 15

(2) Q&A at Princeton, Sept. 24

(3) Q&A with Rhode Island college students, Oct 4

(4) Q&A with educators, Sept. 30

(5) "Welcoming Remarks at Conference on Mortgage Finance and the Future of Housing," Oct. 25

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