Full Ben Bernanke Speech Before National Press Club

Tyler Durden's picture

The lies come hot and heavy:

  • Initial claims for unemployment insurance have generally been trending
    down, and indicators of job openings and firms' hiring plans have
  • QE 'Effective at easing financial conditions'
  • Recovery likely to be 'more rapid' in 2011 than 2010
  • 'Overall inflation remains quite low'
  • Recovery in consumer, business spending may be solid
  • Economy seems to have strengthened in recent months

But here's the only one that matters:

  • Unemployment, inflation likely to defy Fed mandate

Which mandate is that Genocide Ben: would that be the mandate to kill off half the world with your revolutionary policies before the Russell hits 36,000?

Full remarks to be presented by Dictator Ben at the National Press Club, Washington, D.C.

The Economic Outlook and Macroeconomic Policy

Good afternoon. I am pleased to be here at the National Press
Club, and I'm especially glad for the opportunity to have a conversation
with journalists who write about economic policy from our nation's
capital. Your job is not easy, but it is essential. Virtually every
American is affected by developments in the economy and in economic
policy. But contemporary economic issues can be highly complex, and few
nonspecialists have the time or the background to master these issues on
their own. The public must therefore rely on the diligent reporting,
clear thinking, and lucid writing of reporters determined to go beyond
dueling bumper stickers and sound bites to help people understand what
they need to make good decisions, both in their personal finances and at
the polls. These are weighty responsibilities, and the journalists I
know take them very seriously.

Today, I will provide a brief update on the economy and how I
expect it to evolve in the near term. Then I will turn to the
implications for monetary policy. Finally, I will briefly discuss the
daunting fiscal challenges that we face as a nation.

The Economic Outlook
The economic recovery that began in the middle of 2009 appears to
have strengthened in recent months, although, to date, growth has not
been fast enough to bring about a significant improvement in the job
market. The early phase of the recovery, in the second half of 2009 and
in early 2010, was largely attributable to the stabilization of the
financial system, the effects of expansionary monetary and fiscal
policies, and a strong boost to production from businesses rebuilding
their depleted inventories. But economic growth slowed significantly
last spring as the impetus from inventory building and fiscal stimulus
diminished and as Europe's debt problems roiled global financial

More recently, however, we have seen increased evidence that a
self-sustaining recovery in consumer and business spending may be taking
hold. Notably, we learned last week that households increased their
spending in the fourth quarter, in real terms, at an annual rate of more
than 4 percent. Although a significant portion of this pickup reflected
strong sales of motor vehicles, the recent gains in consumer spending
look to have been reasonably broad based. Businesses' investments in new
equipment and software grew robustly over most of last year, as firms
replaced aging equipment and as the demand for their products and
services expanded. In contrast, in the housing sector, the overhang of
vacant and foreclosed homes continues to weigh heavily on both home
prices and residential construction. Overall, however, improving
household and business confidence, accommodative monetary policy, and
more-supportive financial conditions, including an apparent increase in
the willingness of banks to make loans, seems likely to lead to a more
rapid pace of economic recovery in 2011 than we saw last year.

While indicators of spending and production have, on balance,
been encouraging, the job market has improved only slowly. Following the
loss of about 8-1/2 million jobs in 2008 and 2009, private-sector
employment showed gains in 2010. However, these gains were barely
sufficient to accommodate the inflow of recent graduates and other new
entrants to the labor force and, therefore, not enough to significantly
reduce the overall unemployment rate. Recent data do provide some
grounds for optimism on the employment front; for example, initial
claims for unemployment insurance have generally been trending down, and
indicators of job openings and firms' hiring plans have improved. Even
so, with output growth likely to be moderate for awhile and with
employers reportedly still reluctant to add to their payrolls, it will
be several years before the unemployment rate has returned to a more
normal level. Until we see a sustained period of stronger job creation,
we cannot consider the recovery to be truly established.

On the inflation front, we have recently seen significant
increases in some highly visible prices, notably for gasoline. Indeed,
prices of many commodities have risen lately, largely as a result of the
very strong demand from fast-growing emerging market economies,
coupled, in some cases, with constraints on supply. Nevertheless,
overall inflation remains quite low: Over the 12 months ending in
December, prices for all the goods and services purchased by households
increased by only 1.2 percent, down from 2.4 percent over the prior 12
months.1 To
assess underlying trends in inflation, economists also follow several
alternative measures of inflation; one such measure is so-called core
inflation, which excludes the more volatile food and energy components
and therefore can be a better predictor of where overall inflation is
headed. Core inflation was only 0.7 percent in 2010, compared with
around 2-1/2 percent in 2007, the year before the recession began. Wage
growth has slowed as well, with average hourly earnings increasing only
1.8 percent last year. These downward trends in wage and price inflation
are not surprising, given the substantial slack in the economy.

Monetary Policy
In sum, although economic growth will probably increase this
year, we expect the unemployment rate to remain stubbornly above, and
inflation to remain persistently below, the levels that Federal Reserve
policymakers have judged to be consistent over the longer term with our
mandate from the Congress to foster maximum employment and price
stability. Under such conditions, the Federal Reserve would typically
ease monetary policy by reducing the target for its short-term policy
interest rate, the federal funds rate. However, the target range for the
funds rate has been near zero since December 2008, and the Federal
Reserve has indicated that economic conditions are likely to warrant an
exceptionally low target rate for an extended period. As a result, for
the past two years we have been using alternative tools to provide
additional monetary accommodation. 

In particular, over the past two years the Federal Reserve has
further eased monetary conditions by purchasing longer-term securities
on the open market. From December 2008 through March 2010, we purchased
about $1.7 trillion in longer-term Treasury, agency, and agency
mortgage-backed securities. In August 2010, we began reinvesting the
proceeds from all securities that matured or were redeemed in
longer-term Treasury securities, so as to keep the size of our
securities holdings roughly constant. Around the same time, we began to
signal to financial markets that we were considering providing
additional monetary policy accommodation by conducting further asset
purchases. And in early November, we announced a plan to purchase an
additional $600 billion in longer-term Treasury securities by the middle
of this year. All these purchases are settled through the banking
system, with the result that depository institutions now hold a very
high level of reserve balances with the Federal Reserve.

Although large-scale purchases of longer-term securities are a
different monetary policy tool than the more familiar approach of
targeting the federal funds rate, the two types of policies affect the
economy in similar ways. Conventional monetary policy easing works by
lowering market expectations for the future path of short-term interest
rates, which, in turn, reduces the current level of longer-term interest
rates and contributes to an easing in broader financial conditions.
These changes, by reducing borrowing costs and raising asset prices,
bolster household and business spending and thus increase economic
activity. By comparison, the Federal Reserve's purchases of longer-term
securities have not affected very short-term interest rates, which
remain close to zero, but instead put downward pressure directly on
longer-term interest rates. By easing conditions in credit and financial
markets, these actions encourage spending by households and businesses
through essentially the same channels as conventional monetary policy,
thereby supporting the economic recovery.

A wide range of market indicators supports the view that the
Federal Reserve's securities purchases have been effective at easing
financial conditions. For example, since August, when we announced our
policy of reinvesting maturing securities and signaled we were
considering more purchases, equity prices have risen significantly,
volatility in the equity market has fallen, corporate bond spreads have
narrowed, and inflation compensation as measured in the market for
inflation-indexed securities has risen from low to more normal levels.
Yields on 5- to 10-year Treasury securities initially declined markedly
as markets priced in prospective Fed purchases; these yields
subsequently rose, however, as investors became more optimistic about
economic growth and as traders scaled back their expectations of future
securities purchases. All of these developments are what one would
expect to see when monetary policy becomes more accommodative, whether
through conventional or less conventional means. Interestingly, these
developments are also remarkably similar to those that occurred during
the earlier episode of policy easing, notably in the months following
our March 2009 announcement of a significant expansion in securities
purchases. The fact that financial markets responded in very similar
ways to each of these policy actions lends credence to the view that
these actions had the expected effects on markets and are thereby
providing significant support to job creation and the economy.

My colleagues and I have said that we will review the asset
purchase program regularly in light of incoming information and will
adjust it as needed to promote maximum employment and stable prices. In
particular, it bears emphasizing that we have the necessary tools to
smoothly and effectively exit from the asset purchase program at the
appropriate time. In particular, our ability to pay interest on reserve
balances held at the Federal Reserve Banks will allow us to put upward
pressure on short-term market interest rates and thus to tighten
monetary policy when required, even if bank reserves remain high.
Moreover, we have developed additional tools that will allow us to drain
or immobilize bank reserves as required to facilitate the smooth
withdrawal of policy accommodation when conditions warrant. If needed,
we could also tighten policy by redeeming or selling securities.

Fiscal Policy
Fiscal policymakers also face significant challenges. The federal
budget deficit has expanded to an average of more than 9 percent of
gross domestic product (GDP) over the past two years, up from an average
of about 2 percent of GDP during the three years prior to the
recession. The extraordinarily wide deficit largely reflects the
weakness of the economy along with the actions that the Administration
and the Congress took to ease the recession and steady financial
markets. However, even after economic and financial conditions have
returned to normal, the federal budget will remain on an unsustainable
path, with the budget gap becoming increasingly large over time, unless
the Congress enacts significant changes in fiscal programs.

For example, under plausible assumptions about how fiscal
policies might evolve in the absence of major legislative changes, the
Congressional Budget Office (CBO) projects the deficit to fall from
around 9 percent of GDP currently to roughly 5 percent of GDP by 2015,
but then to rise to about 6-1/2 percent of GDP by the end of the decade.2 After
that, it projects the budget outlook to deteriorate even more rapidly,
with federal debt held by the public reaching almost 90 percent of GDP
by 2020 and 150 percent of GDP by 2030, up from about 60 percent at the
end of fiscal year 2010. 

The long-term fiscal challenges confronting the nation are
especially daunting because they are mostly the product of powerful
underlying trends, not short-term or temporary factors. The two most
important driving forces for the federal budget are the aging of the
U.S. population and rapidly rising health-care costs. Indeed, the CBO
projects that federal spending for health-care programs--which includes
Medicare, Medicaid, and subsidies to purchase health insurance through
new insurance exchanges--will roughly double as a percentage of GDP over
the next 25 years.3 The
ability to control health-care costs, while still providing
high-quality care to those who need it, will be critical for bringing
the federal budget onto a sustainable path.

The retirement of the baby-boom generation will also strain
Social Security, as the number of workers paying taxes into the system
rises more slowly than the number of people receiving benefits.
Currently, there are about five individuals between the ages of 20 and
64 for each person aged 65 and older. By 2030, when most of the baby
boomers will have retired, this ratio is projected to decline to around
3.4 Overall,
the projected fiscal pressures associated with Social Security are
considerably smaller than the pressures associated with federal health
programs, but they are still notable.

The CBO's long-term budget projections, by design, do not account
for the likely adverse economic effects of such high debt and deficits.
But if government debt and deficits were actually to grow at the pace
envisioned, the economic and financial effects would be severe.
Sustained high rates of government borrowing would both drain funds away
from private investment and increase our debt to foreigners, with
adverse long-run effects on U.S. output, incomes, and standards of
living. Moreover, diminishing investor confidence that deficits will be
brought under control would ultimately lead to sharply rising interest
rates on government debt and, potentially, to broader financial turmoil.
In a vicious circle, high and rising interest rates would cause
debt-service payments on the federal debt to grow even faster, causing
further increases in the debt-to-GDP ratio and making fiscal adjustment
all the more difficult. 

How much adjustment is needed to restore fiscal sustainability in
the United States? To help answer this question, it is useful to apply
the concept of the primary budget deficit, which is the government
budget deficit excluding interest payments on the national debt. To
stabilize the ratio of federal debt to the GDP--a convenient benchmark
for assessing fiscal sustainability--the primary budget deficit must be
reduced to zero.5 Under
the CBO projection that I noted earlier, the primary budget deficit is
expected to be 2 percent of GDP in 2015 and then rise to almost 3
percent of GDP in 2020 and 6 percent of GDP in 2030. These projections
provide a gauge of the adjustments that will be necessary to attain
fiscal sustainability. To put the budget on a sustainable trajectory,
policy actions--either reductions in spending or increases in revenues
or some combination of the two--will have to be taken to eventually
close these primary budget gaps.

By definition, the unsustainable trajectories of deficits and
debt that the CBO outlines cannot actually happen, because creditors
would never be willing to lend to a government with debt, relative to
national income, that is rising without limit. The economist Herbert
Stein succinctly described this type of situation: "If something cannot
go on forever, it will stop."6 One
way or the other, fiscal adjustments sufficient to stabilize the
federal budget must occur at some point. The question is whether these
adjustments will take place through a careful and deliberative process
that weighs priorities and gives people adequate time to adjust to
changes in government programs or tax policies, or whether the needed
fiscal adjustments will be a rapid and painful response to a looming or
actual fiscal crisis. Acting now to develop a credible program to reduce
future deficits would not only enhance economic growth and stability in
the long run, but could also yield substantial near-term benefits in
terms of lower long-term interest rates and increased consumer and
business confidence. Plans recently put forward by the President's
National Commission on Fiscal Responsibility and Reform and other
prominent groups provide useful starting points for a much-needed
national conversation. Although these proposals differ on many details,
they demonstrate that realistic solutions to our fiscal problems are

Of course, economic growth is affected not only by the levels of
taxes and spending, but also by their composition and structure. I hope
that, in addressing our long-term fiscal challenges, the Congress and
the Administration will seek reforms to the government's tax policies
and spending priorities that serve not only to reduce the deficit, but
also to enhance the long-term growth potential of our economy--for
example, by reducing disincentives to work and to save, by encouraging
investment in the skills of our workforce as well as in new machinery
and equipment, by promoting research and development, and by providing
necessary public infrastructure. Our nation cannot reasonably expect to
grow its way out of our fiscal imbalances, but a more productive economy
will ease the tradeoffs that we face.

Thank you. I would be pleased to take your questions.

1. Inflation data are derived using the price index for personal consumption expenditures. Return to text

2. The so-called alternative fiscal
policy scenario, which assumes, among other things, that most of the tax
cuts enacted in 2001 and 2003 are made permanent and that discretionary
federal outlays rise at the same rate as GDP, is presented in
Congressional Budget Office (2010), The Long-Term Budget Outlook (Washington: CBO, June (revised August)). Return to text

3. See the two long-term scenarios for mandatory federal spending on health care shown in figure 2-3, p. 39, in CBO, The Long-Term Budget Outlook, in note 2. Return to text

4. These figures are the inverse of
the ratio of the population age 65 or older as a percentage of the
population ages 20 to 64 shown in figure 3-2, p. 47, in CBO, The Long-Term Budget Outlook, in note 2. Return to text

5. This result requires that the
nominal rate of interest paid on government debt equal the rate of
growth of nominal GDP, a condition which usually serves as a reasonable
approximation. If the rate of interest on government debt is higher than
the growth rate of nominal GDP, as might happen if creditors become
wary of lending, then a primary budget surplus rather than primary
balance is needed to stabilize the ratio of debt to GDP. Return to text

6. Herbert Stein (1997), "Herb Stein's Unfamiliar Quotations," Slate, May 16, www.slate.com/id/2561. Return to text