Bernanke Begins Public Dialogue With Pledge to Maintain Record Stimulus
Ben S. Bernanke, at the first press conference by a Federal Reserve Chairman following a policy meeting, said the economy still requires monetary support while the need to contain inflation means further easing is unlikely.
The 57-year-old former Princeton University professor stepped before the television cameras in a top-floor conference room in the Fed’s Washington headquarters yesterday and began a dialogue with the American public about the central bank’s goals and strategies. He explained the tension between reducing an 8.8 percent unemployment rate and keeping a lid on inflation.
“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk,” Bernanke said to nearly 60 reporters. “Ultimately, if, if inflation persists or if inflation expectations begin to move, then there’s no substitute for action,” he said. “We would have to respond.”
The Fed’s decision to have its chairman hold press conferences four times a year fulfills a key goal Bernanke has sought since he was a governor in 2002. The added transparency, already practiced by central banks from the U.K. to New Zealand, over time is likely to narrow the range of estimates on when the Fed will change course and reduce swings in short-term interest rates, said Julia Coronado at BNP Paribas.
If the Fed can communicate its intentions better, “there would naturally be less volatility,” especially in money markets that are most affected by changes in the Fed’s policy rate, said Coronado, the firm’s New York-based North America chief economist.
The 46-minute press conference gave Bernanke a chance to explain yesterday’s five-paragraph statement by the Federal Open Market Committee, released less than two hours earlier. The FOMC agreed to finish $600 billion of Treasury purchases in June and said surging commodity prices will probably have a transitory effect on inflation.
“While it’s very, very important for us to try to help the economy create jobs and to support the recovery, I think every central banker understands that keeping inflation low and stable is absolutely essential to a successful economy,” Bernanke said.
Gross domestic product rose at a 1.8 percent annual rate in the first quarter, slowing from the 3.1 percent pace in the last three months of 2010, the Commerce Department said today in Washington. The Fed’s preferred price measure, the personal consumption expenditures index, minus food and energy, rose at a 1.5 percent annual rate.
Treasury 10-year yields approached the lowest in more than a month today as growth slowed more than forecast by economists. The yield dropped four basis points, or 0.04 percentage point, to 3.32 percent at 9:05 a.m. in New York.
“You have to look at this in a broad sweep of history,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, said in reference to the press conference. “It is a matter of being more open and having another avenue to convey to the public what the basic strategy is.”
Before yesterday, economists such as Stanley searched out changes of even a few words in the FOMC statement, trying to discern why policy makers decided to raise or lower interest rates or do nothing at all. While the statement provided hints about future moves, Bernanke placed the discussion yesterday in the context of prices and jobs, the Fed’s two mandates from Congress.
Teaching the Public
“He is teaching the American public about how monetary policy works and about the tradeoffs the Fed faces,” said Ethan Harris, head of North American economics at Bank of America Merrill Lynch in New York.
Bernanke’s comments provided additional context to the statement that normally wouldn’t be available to investors until the minutes are released three weeks later, or in speeches or congressional testimony.
The live press conferences depart from more staged events such as Bernanke’s interviews with CBS Corp.’s “60 Minutes” program in 2009 and 2010, and a town-hall-style discussion on PBS television.
Once the Fed finishes its $600 billion bond-purchase program in June, “we are going to continue to reinvest maturing securities, both Treasuries and MBS, so the amount of securities that we hold will remain approximately constant,” Bernanke said, referring to mortgage-backed securities. “Monetary policy easing should remain constant going forward from June.”
He added that “an early step” in reversing this policy “would be to stop reinvesting all or a part of the securities” maturing.
‘Marcel Marceau’ Policy
As a professor and policy maker, Bernanke has been a promoter of central bank transparency. When he was a Fed governor in 2003, he said a central bank that didn’t explain itself had a “‘Marcel Marceau’ monetary policy, allowing its actions to convey all its intended meaning.”
University of Chicago economist Robert Lucas, winner of the Nobel Prize in 1995, showed that government policies would be more effective if public expectations were aligned with credible goals. For Bernanke’s generation of central bankers, Lucas’s theory became a matter of creed.
Central banks in the U.K., New Zealand, Canada, Australia and Sweden all adopted numerically specific inflation goals in the 1990s to help set public expectations. Central banks also enhanced their communications strategies. The Bank of England, the Reserve Bank of New Zealand, the Bank of Japan and the European Central Bank all hold regular press conferences.
“I personally have always been a big believer in providing as much information as you can to help the public understand what you’re doing, to help the markets understand what you’re doing, and to be accountable to the public for what you’re doing,” Bernanke said yesterday.
Under Alan Greenspan in the late 1980s, the Fed began targeting the federal funds rate, achieving what economists call “instrument transparency.”
Still, it would take about two decades for the Fed to give the public greater clarity about how it defined low inflation and full employment.
The Fed decided in 1994 to release a statement when policy actions had been taken, and in 2000 to issue a statement after each meeting.
“There was a view that there was some benefit to opaqueness” among Greenspan and his deputies at the Fed, even though modern macroeconomic theory pointed to the contrary, said Mark Gertler, a New York University economist who has co-written research with Bernanke.
Former Fed Vice Chairman Alan Blinder said in a 2002 paper that when he joined the Fed in 1994, the Board’s press officer discouraged him to speak about the economy.
“Trust me, his briefing was not to extol the virtues of transparency,” Blinder wrote. “At one point, he informed me: ‘We don’t talk about the economy.’ I looked at him incredulously and replied, with just a trace of sarcasm: ‘Then what would you like me to talk about? The weather?’”
Under Bernanke, who took over in 2006, the Fed began publishing quarterly forecasts of Federal Open Market Committee members. In 2009, FOMC members added longer-run estimates for growth, unemployment and inflation. Those estimates served as implicit targets.
The Fed will now release those forecasts three weeks earlier than in the past, and the chairman explained them in his opening remarks. Policy makers lowered their forecasts for economic growth this year and raised estimates for a key gauge of inflation that excludes volatile food and energy prices.
Marvin Goodfriend, an economist at Carnegie Mellon University in Pittsburgh, said the press conferences will allow the Fed chairman to explain how the central bank plans to use its tools to achieve its longer-term goals. The former Richmond Fed policy adviser calls it “deliberative transparency,” where the Fed chairman provides “the public with a sense of the reasons for Fed policy and actions.”
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