tv [untitled] CSPAN June 20, 2009 11:30am-12:00pm EDT
growing list of eligible securities. talf is generated to opposite concerns. one is that the credit requirements were very conservative. the other is the central bank is taking too much credit risk on its balance sheet. i think we have struck a good balance. we have taken appropriate action to limit our exposure to credit risk through stringent credit qualities. hentoff is not intended to substitute for the aps markets as they existed before the crisis. -- a b.s. markets as they existed before the crisis. we want to get the markets back to life by mitigating some of the stresses they are experiencing. it should allow them to reach their purpose has in a less dis.
the top program has been working. some investors are re-entering the market without the support which is a good sign. the third precept relates to size. until recently, monetary policy had changed in small steps. it was a behavior that some have labeled. our response to the present crisis has moved beyond gradualism. our cats were one indication and the size of our untraditional policies is another. last march, we announced a considerable increase in the size of another program, our large-scale asset purchases where we by agency debt and
treasury securities. these actions taken together represent an escalation of our non-traditional policies and will probably increase the size of our balance sheet will above what it was until a year ago. i think this aggressive move was a proper it considering the many risks we were facing. there was uncertainty surrounding our new tools. future developments would help us determine if our actions today were too much, too little, or just right. we have moved swiftly to launch nontraditional policy. some of them have taken time to implement because they require great care to design. just as traditional policy is well run -- well known to take time to affect economic activity, so are these policies.
our policies will take time to gain full attraction. weak economic news would not imply that we have misjudged the size of our latest action. my forecast sees the unemployment rate continuing to increase into 2010. in my view, it would take a significant deterioration relative to our outlook for us to see our policies as inadequate. over time the degree of success and specific programs will let us reconsider the size of our actions. if we find that a given program is not as useful as we anticipated, we will be faced with a choice between making its terms more attractive and taking on more risk or letting it lapse. we will then need to keep in mind that the same level of aggressiveness and have been awarded but the circumstances of the day. the possibility that the economy is close to a turning point is stronger now than just two months ago.
financial spreads have improved even as mortgage rates have increased. growth will likely turn positive in the second half. the inflationary pressures have been weaker than we have feared. we must decide where bolus ens. over time as the economy moves towards sustainable growth and prices, the fed will return to its traditional policies which is setting the funds that rate and reducing its balance sheet in an orderly way. how will it do so? partly on a son. many of our liquidity programs provide short-term loans so as these programs come to an end, the loans will mature quickly and our balance sheet will shrink. the pressing of our programs is designed to be unattractive in normal times. most attractive to those who really need them in unusual times of stress. as they cease to be useful, they
will cease to be used. some programs are already being used less. we will see that trend continue. a significant portion of our balance sheet may not shrink on its own or at the appropriate rate. we need tools to reduce its actively said that monetary policy can be easily be calibrated. in this respect, we can be as creative on the way out as we were in the way in. we can be creative in our liability the way we have been created with our assets. on the asset side, we could sell the assets. they could be sold outright or leased through a reverse repurchase transactions. on the liability side, we pay interest on reserves which we began last fall. without interest on reserves, rates are raised only by restraining the quantity of
reserves available to the market. that is how we have always done it traditionally. -- our target could require sharper reductions in our balance sheet. with interest on reserves, we can raise the interest paid reserves in tandem with our target rate. this will raise the opportunity cost of banks' lending and keep the fed funds rate merely target. as we announce in march, we are seeking with the help of the treasury additional tools through legislative action. an example of such calls would be the authority to issue interest-bearing debt and exchange for reserves or an expansion on the treasury's supplementary financing program. what circumstances might require us to use the tools we have and those we may have in the future to reduce our balance sheet? one clear concern is price stability. our balance sheet grew very fast in a matter of weeks last fall and it remains large.
there are historical precedents for large increases in central bank balance sheets to result in broader credit expansion and to be associated with inflation. i want to emphasize the meddling in this chain. inflationary pressures are likely to rise without broader credit expansion. there is currently no evidence for that. these precedents explain why there is concern and why we look after our ability to reverse the growth in our balance sheet. forecasting inflation is never easy. forecasting comes with this job. the public interest generates a mountain of independent views appropriately, much like a giant auditing service. these are difficult times for this type of forecasting. all one has to do is look at the remarkable lack of consensus among professional forecasters. the spread between the lowest in
the highest inflation forecast of 2010 reported by the blue- chip economic indicators is more than twice what it was one year ago for inflation in 2009. two conflicting forces could come into plane to explain such wide opinions. and high unemployment rate normally plays strong downward pressure on costs and tends to lower inflation. some statistical models have pointed at the possible deflation risk in the quarters ahead. inflation has not fallen to the extent we may have feared. there is another factor that could come into play such as consumers and businesses expectations of future inflation. expectations have remained stable so far. that is a bit of surprise given the severity of the downturn. that economic conditions
improve, consumers and businesses might expect uppers' pressure on inflation. a rise in inflation expectations because imbeded in many economic decisions and makes inflation -- inflation harder to restrain. with inflation near 2%, it is at an acceptable level under normal circumstances. these strong forces work in opposite directions. the fed must be in a position to respond to whatever force is dominant. in conclusion, these a been challenging times. the fed is met the challenge with innovative programs that depart from traditional policy. we a pursued this approach in a manner that is commensurate with the size and the variety of risks we have faced. programs should not obscure the fact that the ins remain unchanged. both policies are aimed at fostering a stable financial
system, separate -- supporting sustainable growth and price stability. as economic conditions improved and we laid the groundwork for a reduction in our balance sheet, these in our in our mind. thank you very much. [applause] >> you can write your questions down. they are collecting the cards right now. he started about your forecast and you expect to see unemployment continued to rise well into 2010. how high do you expect the unemployment rate to rise and do you have a regional forecast as well? >> most recently, the view is --
was that the unemployment rate would rise to 9.5% and it would peak in 2010. events have transpired slightly better than i had envisioned at that time. in terms of financial markets and credit spreads. it is been disappointed with the unemployment rate. we are almost at the place that we expected it to top off. the unemployment rate will get closer to 10% than i thought it would. there is the possibility that it might peak earlier than we thought. i thought it might be some time in the middle of 2010. i can envision it peking by the end of this year and then coming
down -- peaking this year and then coming down. i think we will see positive growth rates and the second half of this year. growth rates will be sustained in 2010. the dichotomies behavior between the beginning of growth and effective job losses continue for an uncomfortable time frame is always a source of concern. it is something we had today with less time in 2003 and 2004. it is in our mind how to respond to that. in terms of the regional economy, we have the state of michigan in my district. the auto industry has been difficult. chicago is attractive -- is tracking the nation very well at the moment.
>> it got about the economy turning positive in the second half which many forecasters agree with now. the idea of whether or not it is a jobless recovery or not -- many people are arguing that there is an opportunity for the real time losses in employment make them back because they were over shot. what issues perspective on that? what is the chance of hiring coming back quicker than many have forecasted? what is the probability of that occurring? >> we are experiencing recessions on the order of 7475 which were deeper than the most recent recessions. we are experiencing that unfortunate that, hopefully we can experience job rebounds that gained more quickly after those recessions.
i think it will depend to on how businesses fail on how things are going. since the mid-1980s to keep businesses have been more in tune with keeping their inventories in line. they have not become excess said. they have cut back a lot during this recession. they did not have excess inventory. i think they have right sized those better. that will be better for growth and employment when growth picks up. you need additional labor import to face the demand. we will have to come to grips with that. given the amount of uncertainty that we face, i expect a more mid path between those. >> our next question is what are
the key driving forces to get the u.s. economy out of this recession? statistically we know what can get us into positive growth during the second part of the year. >> that is a hard issue. it is easier to dream up reasons why the economy is facing changes. we are looking at the positive side of the inventory cycle which is that businesses have already cut to lower levels. hopefully that can jump-start a better level of confidence, and businesses will start speaking about spinning their capital futures. if they have adequate access to funding, they may be thinking
about changing bandages of capital investments. if you have to go through a time of recession and the discretion -- destruction that comes with that, hopefully you will benefit from the creative destruction that comes out of it. a number of innovators who can take advantage of new opportunities. the world economy slowing down and experiencing more than what we have experienced, that is unlikely to be an engine of future growth as well. >> exports falling less than imports. >> that is right. that will continue to be a source of uncertainty for businesses as they think about where to position themselves and apply resources. >> a lot of questions on inflation and how you measure it. before we get to that, you said
this inflation -- disinflationary pressures were weaker than the fed had feared. what of the indicators being used as a measure of inflation today? recombinant that any are right? do you think the model arthat te fed is using is affected? -- is effective? >> there has been a lot of research lately which it is that inflation is difficult to forecast. our success in forecasting inflation movements is not very good. it is a very large difficulty
for all of us. during the current environment with the economic contraction that has been so large, we were expecting to see and have seen large resource gets a merge which is put downward pressure on prices. we have not been experiencing upward pressure on the costs. who saw the beneficial effect. workers are being laid off and wage pressures are minimal in that environment. resources are relatively abundant and able to be deployed. it is very difficult to see inflationary pressures. everything is equal, set up by those circumstances. the question is how much would you expect with an unemployment
rate forecast headed upwards of 10% which is a very large number relative to the sustainable level of unemployment which is closer than 5%. i would have expected inflation to come down more. inflation so far has not come down very quickly. it takes time for it to respond. we are still concerned that these disinflationary forces are out there. inflationary expectation is part of the equation. it is a little bit higher than what we thought, it would offset things by a certain amount.
we are looking for indications that neither of those factors are behaving differently or more strongly than we had guests. we're thinking about 3 source gaps. we are looking all measures that provide indication of inflationary expectation. they have not behaved in a way that makes us concerned. the tips of data, we are always looking at that. it is a big challenge to get through the liquidity issues which is change a lot in those markets. those are some of the things we're looking at. >> this is related to what has been going on in the auto industry. one of the arguments for bailing out the auto industry is saying
there is a fear that the entire manufacturing sector would be undermined. the remainder of what was left, ford and toyota -- in terms of this credit crisis, some have gone chapter 7 instead of chapter 11. that could cause a stumbling block to ramping up on production. what is your sense of the anecdotal versus the reality of that? what do you think happened to this supply chain? >> i think it is too early to know precisely what the effect of the current policy has been. it is been a real challenge to
get through the financing issues versus the structural issues facing the industry, how the networks are used by each of the companies in the chain. there has been the feeling from years before that the supply chain was a bit larger than needed for the sales and production base they were looking at. it is going to be smaller for sure. throughout this entire economic and financial time of this progress, we a been thinking about spillover -- time of distress, we have beenabout spillover effects. -- we have been thinking about a
spillover effect. -- effects. we have been looking at things in a transitory fashion. >> this goes back to the national forum. ben bernanke recently made a statement to congress about the role the deficits could place in the future in terms of spurring inflation. and what people to think beyond the current situation. they are wondering how the current deficit problems could lead to inflationary pressures and how it might complicate your job and the federal reserve in having fiscal discipline. what is your sense about
inflation and the issue of monetary versus fiscal stimulus? >> this is a difficult time for everybody. i look the the last election as, no matter who won the election, this is the administration that would have to deal with the fiscal issues facing the country and taxpayers coming down the line with the changing demographics, the baby boomers retiring, so security, medicare. >> i think we have limited the retirement option. [laughter] >> we have all of these issues. on top of that we have the largest recession in the post work time frame.
we were extremely concerned about this inflationary force in the financial distress that came with everything. i thought it was entirely appropriate to provide as much stimulus as we could. we did that on the monetary policy side. we have done a tremendous number of innovative programs which has taken as to the boundary of our a 30's. it is very uncomfortable for everybody involved. it seemed like the appropriate thing to do. s open the other issues. we have walked into the opening of these issues for the good of putting the, the best possible footing in these circumstances. the fiscal stimulus was an important part of that. we can all talk about the various elements of these programs. nobody will agree on everything. the size of the program i thought was very important.
that adds to all the challenges. the challenges remain and they need to be dealt with by all of us. we have to make choices about the level of spending, how much will be funded, that it should be funded, and position ourselves going forward. im understand people may think that we face challenges, but we have our responsibility to provide financial conditions would support sustainable growth and price stability. those of very important. we will pay great attention to that in conjunction with everything else that is going on. this is not a time where you can demonstrate to everybody that price stability will be maintained and sustainable growth will be provided for. we have the programs in place. we will do the best job we can. it brings up another issue.
during the 1990's, greenspan had a long time. he played a more political role. he argued that the means justify it the chance. getting fiscal discipline was important. talking with the clinton administration about fiscal discipline. i think it is interesting to see ben bernanke talking about fiscal discipline. that is appropriate within the context of what we were talking about. i watched the testimony to congress. it was not the fiscal stimulus of the great depression that was a problem but it was that it was
not big enough. that is what he said. the fiscal stimulus along with monetary -- is causing people to think longer-term. how much more doesn't put the fed in a position of being more outspoken? you are the ones that have to pick up the pieces that the other end of it. >> we have to understand the ramifications of fiscal policy and government spending and how it will affect the workings of the u.s. economy. we have to understand where we are on that trajectory. it is standard fare for us to be paying attention to the confectionary effects of fiscal programs as well as other programs in the international environment.
we have to understand it more or less accommodation should be put in place to keep inflation in the range this is supposed to be in. you are talking about over and above those issues. those are not the ones i am embarking on line. the chairman of the federal reserve is a very important occupation. >> i will ask one last question. i am not sure if you will answer it for us. you might. >> maybe i should not. >> that means you should. you could probably answer its without not answering it.