Federal Reserve Press Conference With Ben Bernanke: Wall Street Relieved
In an unprecedented press conference, Federal Reserve chairman Ben Bernanke argued that the economy is slowly getting better, but defended the central bank's decision to keep interest rates low. It looks like Wall Street bought it.
For months, Americans have watched with alarm as unemployment has remained painfully high and the costs of food and fuel have skyrocketed. But speaking at a press conference Wednesday—a first for the Federal Reserve—central-bank chairman Ben Bernanke said the U.S. economy was improving moderately and inflation was not an immediate concern. After getting off to a cautious start, Wall Street appeared buoyed by the news, perhaps as much for Bernanke's outlook as for his predictability; the Dow Jones industrial average rose 95.59 points to close at 12,690.96.
On Wednesday the Fed also announced that it would keep interest rates near zero for "an extended period of time," in an effort to propel the recovery. Yet Bernanke appeared confident that there has already been considerable improvement; in its monthly note, the central bank said it would conclude its controversial program to purchase $600 billion in U.S. Treasury bonds by the end of June.
"The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually," the Fed's policymaking committee said in its monthly note, which was released shortly before the press conference. "Commodity prices have risen significantly since last summer … but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."
The program, known as quantitative easing, began last November amid concerns about the potential for spiraling price decreases—a crippling economic phenomenon known as deflation. Those fears seem to have passed, though analysts continue to debate the effectiveness of the Fed's policies. In recent months, a number of critics have said the Fed has spurred inflation and devalued the dollar, while others have complained that it has done too little to combat the 8.8 percent unemployment rate.
After getting off to a cautious start, Wall Street appeared buoyed by the news, perhaps as much for Bernanke's outlook as for his predictability.
His voice quivering slightly, Bernanke used dry, professorial language to defend the Fed's second round of quantitative easing and its limited scope.
"Relative to what we expected, I think the program was successful," he said. "We were very clear that this was not going to be a panacea."
He added that the program's end was unlikely to have any adverse effects on the economy or the financial system.
"Markets have well anticipated this step," he said.
For all his cautious optimism on the economy, Bernanke lowered his growth projections slightly for 2011 and said unemployment is likely to remain a problem for the foreseeable future. He said that growth could accelerate at a rate of more than 4 percent over the next few years, but that unemployment would fall only to around 7 percent by 2013.
The Fed chairman dismissed concerns about the recent rise in food and energy prices, and said that reacting rashly to "transitory" price increases in commodities could lead to deflation. Nevertheless, he said he and his fellow policymakers would continue to closely monitor how price increases evolve.
Bernanke's press conference was an unprecedented event for an institution that has long been shrouded in secrecy. For years, Fed officials have feared that greater transparency would roil the financial markets. Only in the mid-1990s did the central bank begin to publicly announce changes in interest-rate policy. Yet in the aftermath of the financial crisis, the Fed has faced scathing criticism for its economic and regulatory stewardship.
That criticism continued Wednesday, as neither the left nor the right seemed satisfied with the historic event. " Bernanke Wimps Out," read the headline of a blog post by Paul Krugman, the Nobel Prize–winning economist and columnist for The New York Times.
"The central bank should be doing much more quantitative easing, not stopping with the U.S. still facing high unemployment and the unemployed themselves increasingly desperate," Krugman wrote. "[Bernanke] has been intimidated by the inflationistas, and is looking for excuses not to act."
The inflationistas were not pleased either.
"The Fed had an opportunity, with a simple interest-rate hike, to stomp out inflation and shore up the dollar in one move," said Peter Leeds, a financial analyst who runs an eponymous newsletter, in an email. "By deciding instead to maintain the status quo, they've all but assured America that inflation will rise, and potentially accelerate to worrisome levels."
Yet not everyone was so critical.
"It is looking less and less likely that growth will falter," said Augustine Faucher, an economist at Moody's Analytics, in a note Wednesday. "This year should be a very good one for the U.S. economy."
R.M. Schneiderman is a reporter for Newsweek.