tv Street Signs CNBC December 12, 2012 2:00pm-3:00pm EST
number two, we have vote a phone that is a very high dividend. high dominance in emerging markets in terms of their emerging market. >> right. >> then chevron. chevron will do well as energy prices continue to ramp up. and if inflation continues to be the talk, and we are seeing that, i think you will see more. >> ty, over to you. >> thank you. the fed went on a shocker on the order of lindsay lohan saying she
is staying home far month to bake cookies. we have more on ben bernanke coming up. that does if for "power lunch," ladies, gentlemen. thanks for watching. welcome to a special edition of "street signs." we are minutes away from fed chairman's ben bernanke's news conference. there is a specific employment rate along with inflation target, there is a lot to talk about. let us bring in steve with more and the fed's outlook, steve? >> i think the story here today
is federal reserve despite saying it will spend something like a trillion dollars in additional qe this year or next year is lowering its economic forecast. if you look at the outlook for 2012 through 2015, it actually lowered the outlook from its september forecast. take a look here. tenth off of 2012. tenth off of 13. 15 bases points out of 2014 and 2015. look at what the federal
reserve did with unemployment rate. it did lower that as well. remember that a key reason why the federal reserve announced today, it'll be doing another $45 billion in quantitative easing bringing the total to $85 billion a month. can you see a quarter point from it in 2012. 20 in 2013. and on ward towards 2015, but just look at that. 80 basis points off the unemployment according to the
fed's forecast. that suggests you get very little bang for your qe buck there, brian. i think that is something worjs discussing. they will spend, if they do, $85 billion a month. trillion this year in quantitative easing. over the course of the next couple of years, bringing the unemployment down by 80 bases points in total. >> i don't want to step on mandy's toes, because i would probably crush her feet. but i want it jump in quickly on this. two quick questions. i'm getting this on twitter. how long do we have to be below 6.5%. is it little rattly one month payroll report? if we don't get there, if we don't get there, could we have these rates literally forever, aka, as long as we live? >> so now you are getting in my question i might ask bernanke. so i will talk in a letter voice. just between you and me, brian -- >> and the niegs. >> nation. >> you're right, it just said, they had have a longer term and
detail sense. no and if you read further into the next sentence, it almost contradicts saying we won't look at just unemployment, we will look at broad range of things. it looks like the fed wants to be half pregnant. say we are using them but say, well, we are not really just using those. and remember when we talked about at noon, brian, there is actually two different components going on. component number one is the litness test for quantitative easing. there is a separate one and that's where the numerical targets come in and that's the issue of the feds rate. the target at 2.5 on inflation do not apply to qe. i don't want marcus to make that mistake. we don't know what the targets are for qe, if they exist at all. >> thank you. >> mandy? >> just minutes away from hearing from ben bernanke. so why don't we bring in bob here on the floor of the
exchange. there is bazzle between stock and bonds. >> stimulus to infinite and beyond. that's ben bernanke and toy story. very famous role for ben bernanke. the minute they heard, we will keep going and going and going, the stock market froze. we are now up, mandy, six days in a row. seven-week highs. expansion of new highs at the new york stock exchange. predictably, dollar concerns. inflationary concerns. dollar weakness. there's the dollar index moving to the down side. that helps commodity, copper moving up. material stocks one of the big movers on this announcement. you see the material index moving up. and s&p index is at 52-week high. there it is, 329. i want to note that bond market is freaking out a little bit because of obvious inflationary implications of what the federal reserve is doing. there's your battle.
inflation hawks. >> i want to throw a question at you. and it something that steve said a moment ago. that means we are getting less bang for qe buck. will the same go for what kind of impact it will have on the stock market as well? >> i think studies indicate we have less bang as qe programs are announced. bottom line though, is 50, 60 points, is that a great move on the dow s the dow? i would say it is pretty modest. >> they are getting more and more modest. >> we are high for the sixth straight day. raising all of those losses since november 6. election. and obviously people are expecting, i guess something to get done at end of the year. okay, brian, back over to you at hq. >> thank you. before we get to rick santelli, i have to give a great shot out for the fed shot this afternoon. they made this cool graphic. maybe not stopping us from going
over the cliff but do they have the fiscal firepower? the strength, sfow, as i call it, sheer force of will. to pull the economy back, should we go over? great job as always by our team. thank you. >> big surprise today, fomc setting economic specific targets, saying it expects to keep interest rates near zero as long as unem plounemployment remains 2.6%. also agency mortgage backed security at a pace of $40 billion a month and feds announce what some call qe 4 or qe 4 1/2. they commit to longer tune treasuries to the tune of 45 billion. to the fed sheet big and getting big wesh rick. i just wonder, where the money comes from. is this a giant hewlett-packard
or what kind of printer is this? >> i don't know what kind of printer it is. but one person's deficit is another person's stimulus. that is stimulus. when we look at things like one trillion against the 15 trillion economy, on the deficit, what is that, about 7%? what is gdp, 2%? are we minus 5%? a lot of questions. but i think the biggest we have heard today, is an old bond guy. 3 to 5 basis points, from the bond market, freaking out. it is not that big of a move, it is big based on the fed. but is it really that we're all thinking 6.5% around the corner? no, probably more of that inflation around the corner but the biggest thing i disagree with, is that i don't think that the fed will voluntarily ever go for the exit. i think they will just go to burrow deeper down management. i think with lockup owned by had fed, the market forcing the fed
to go toward the exit and one day the market will reverse and all these monster positions will reverse and the fed, you think ben needs strength to hold that car and hold the bond market up if it decides it sell, there is a new bond market called ben bernanke's srugs. great to have you all with us. joe, you are sitting next to me so i will get to you first of all. what do you think the markets and economy want to hear from ben today? >> i think they will want it hear more about that unemployment rate at 6.5, is that a trigger or flesh hold. i think that is probably something that is a rough guide post. as you move closer to the 6.5% rate, markets will discount tightening. >> what if we only get to 6.5% because of shrinking labor force. people are giving up and just dropping out. >> that's where inflation will pick up. core inflation is running
consistently around 2% with growth at only 2 which tells me that potential has fallen dramatically. it is possible that a year or two from now we could have unemployment near 6.5. it may not go lower because of structural issue net market. yet, core inflation moves up to 2.5 or 275. and the market will start to price some of this policy removal. ? >> the question i would love to ask the chairman is more of what he thinks the side effect are to the stimulus. in some ways, amanda, this is bad for us and for the stock market i would make the argument that qe is holding back the market. and i will give you this example. if we have better than expected job numbers, the market will take that into n a mixed way. it should take a positively but think okay, now our safety net will evacuate from the market and so i would like to know from the chairman, what does he think the long-term side effects are now to all of this accommodating
stimulus. i'm not saying i disagree with it but we need to think about what ramifications are. >> and i think that brings up a very important point. they generate the months and quarters ahead and everyone shift the big boetd, right? >> yes. >> what if all of saud, and i don't expect it in december or january, but what if we end up with 6% unemployment rate. it shocks and surprises everybody. m well, now you know the fed will stick by its word and we have to raise rates. we could see trillions of dollars shift in a day, couldn't we? >> we could. but the market is anticipatory, so it will move in anticipation of the 6%. and in the short term, you may get the market to come back with the equities trace as movement we expect higher in the near term. but look, ultimately the best thing for equity investors is higher brond prices because you
get will jallocation trade. and in some sense there is her and we move from bonds into risk assets. >> you are watching a live picture where we see ben bernanke step up and give us our news conference any minute now. he will stand be, meets p the ps and give us what we want. >> and check this out. manhattan is rising above. this is a billboard on the west side highway. look at it. it's huge. bigger than multiple cars put together and trucks and pets and friends. it is huge. and it is rising above the west side highway. [ male announcer ] with wells fargo advisors envision planning process, it's easy to follow the progress you're making toward all your financial goals. a quick glance, and you can see if you're on track. when the conversation turns to knowing where you stand, turn to us. wells fargo advisors.
welcome back to very special edition of "street signs." we are still waiting for ben bernanke. we will go to him any minute now. in the meantime, let's bring back deutsche bank's joe and also sky bridge capitol. joe, if they can't get us a greater rate of growth, how do they dig us out of a recession? >> they're not. and bernanke admitted as much earlier this year that they could not offset the full effect of the cliff. i think they are worried about it. the fact they did not allude that growth could be under 1% is a sign that below the surface they are worried about it and we see it in the fc1 minutes as
well. they want ahead of this which is why they are doing all this qe. >> brian? >> hello, mandy. >> hi. >> i'm here. >> sorry. just pausing to let you jump in there. >> it's fine. i was just reflecting on the gloriousness of the billboard. guys, and anthony, i will throw this one to you, low rates were considered a solution to a crisis. we are out of crisis mode. why are we still here? you know what, my question is so long -- >> the chairman is coming on now. let's turn it over to him. >> thank you, anthony. let's do it. >> good afternoon. it's been about 3 1/2 years since the economic recovery began. the economy continues to expand at a moderate pace.
unfortunately however, unemployment remains high. about 5 million people were more than 40% of the unemployed have been without a job for six months or more and millions more who said they would like full-time work have been able to find only part-time employment or stopped looking entirely. the conditions now prevailing in the job market represent an enormous waste of human and economic potential. return to broad-based prosperity will require stage improvement in the job market which in turn requires strong economic growth. meanwhile, apart from temporary fluctuations largely swings and energy prices, inflations remain tame and appears slightly to run at or below the market committees 2% objective in coming quarters and over the longer term. against economic backdrop including high-tech nomic employment, they will maintain the policy.
today the commit took steps, mortgage back security at a pace of $40 billion per month. second, the committee decided to purchase longer term treasury securities initially at pace of $45 billion per month after its current program to extend the average maturity of its holdings is complete at end of the year. the continuing purchases the committee seeks to maintain downward pressure on longer term interest rates and key financial conditions accommodative, therefore hiring and economic growth while ensuring that inflation over time is close to 2% objective. finally, the committee today also modified its guidance about future rate policy to provide more information to the public about how it anticipates it will react it involving economic conditions. i will return to the change in our communication after discussing our decision to continue asset purchases. although the committee's announcement today specified the
initial monthly pace and composition of asset purchases it did not give specific dates which the program will be modified or ended. instead the pattern of future asset purchases will depend on the evaluation of incoming information in two respects. first, we expect to continue asset purchases until we see substantial improvement for the labor market in context of price stability np in assessing the extent of process there will be labor market indicators including market rate, payroll employment, hours worked and labor force anticipation among others. increase in demand and production are precursors to labor market conditions we will also look the the pace of economic activity more broadly. second, the committee will be monitoring economic developments for efficacy and draw backs for the asset purchase program.
the purchase overs the past few years provide important support to the economy for example by helping it keep mortgage rates historically low. the committee expects the policy to continue to be effective and cost and risks to remain manageable. but as the program continues we will be regularly updating those assessments. if future evidence suggests the program declined or unintended side effects or risks become apparent as balance sheet grows, we will modify the program is appropriate. more generally the committee intends to be flexible in varying the pace of security purchases in response to information bearing on the outlook or perceived benefits and costs of the program. unlike the explicitly quantitative criteria with the committee eguidance about the federal funds rate which we will discuss in a moment, the criteria the committee will use about decisions and pace of of the purchase program are
qualitative. in particular continuation of asset purchase says tied to seeing substantial improvement for the outlook labor market. because we expect to learn moreover time about the efficacy of costs of asset purchases in the current economic context we believe qualitative guidance is more appropriate at this time. in today's statement, the committee recasts its forward guidance to clarify how it expects its target for the federal funds rate to depend on future economic developments. specifically the committee anticipates that exceptionally low levels for the federal funds rate are likely to be warranted quote at lef as long as unem ploim rate remains above 6.5%. inflation or period of one and tw years ahead is projected to be no more than half percentage point along the longer run goal and longer term inflation expectations continue to be well anchored. this formulation is a change from earlier statements in which forward guidance about the funds rate is expressed in terms after
date. for example, in the statements following a september and october meetings, the committee ipdcated that it anticipated that exceptionally low levels for the federal funds rate are likely to be warranted, quote at least through mid 2015. the modified formulation makes for commitity the intention to obtain accommodation for a stronger economic recovery in the context of price stability. the strategy we believe will support household and business confidence and spending. by tying future monetary policy to economic conditions this formulation of policy guidance should also make monetary policy more transparent and predictable to the public. the change in the form of the committee's forward guidance does not in itself imply any change in the expectations about likely future paths of the federal funds rate since the october meeting. in particular the committee expect the stated flesh hold for unemployment won't be reached
before mid 2015 and projects that inflation will remain close to 2% over that period. thus, given the committee's current outlook, the guidance introduced today is consistent with committee's earlier statements, exceptionally low levels to federal funds rate are likely to be warranted at least through 2015. let me emphasize that 6.5% flesh hold for unemployment rate should not be interpreted for the objective for longer employment. in the economic projections submitted with today's met meeting, the estimate of normal longer run of employment is 5.2 to 6.0%. however, because changes in monetary policy effect the economy with a lag, the committee believes it'll likely begin to need moving away from a policy stance before the economy reaches maximum employment. waiting until maximum employment say chiefed before beginning the process of removing policy
accommodation, could lead to undesirable overshooting of potential output and the longer term inflation objective of 2%. as the statement makes clear, the committee anticipates that policy under the new guide ins will be fully consistent with progress against unemployment and with inflation remaining close to the committee's 2% objective over the longer term. although the mood modfide guidance should profide greater clarity responding to incoming data it by no means puts policy on auto pilot. let me make several points. first, this is a statement notes the committee views current low rate policy as likely to be appropriate yit at least until the specified flesh holds are met. reaching one of those thresholds, however, will not automatically trigger immediate reduction and policy accommodation. for example, if unemployment were to decline to slightly below 6.5% at a time when inflation expectations were
subdued and projected to remain so, the committee might judge an immediate increase and target for federal funds rate to be inappropriate. ultimately in deciding when and how quickly to reduce accommodation the committee will follow a balanced approach in seeking to mitigate deviations from the longer run 2% goal and deviations of employment from its estimated maximum level. second, committee recognizing that no single ind kiter provides a complete assessment of the state of the labor market. and therefore will consider changes in the unemployment rate within the broader context. labor market conditions. for example, in evaluating a decline in the unemployment rate, they take into account the extent to which that decline was associated in increases in employment and hours worked as oppose to say increases in the number of workers and falling labor anticipation. the committee will consider whether the improvement in the unemployment rate appears sustainable.
third, the committee chose to express the inflation threshold in terms of projected inflation between one and two years ahead rather than in terms of current inflation. the committee took the approach it make clear it intends to look through purely trance pourry fluctuations such as those induced by short term variations in prices of international traded commodities and to focus instead on the underlying inflation trend. in making its collective judgment about the underlying inflation trend, the committee will consider a variety indicators including measures such as trimming and core inflation, views of outside forecasters and the predecks of the statistical models of inflation. also the committee will play close attention to the models to make sure the expectations remain well anchored. finally, the committee will continue to monitor wide range of economic and financial developments to insure that
policies conducted in a manner consisted with our dual mandate. the asset purchase answers funds ride giens us are somewhat different. the goal of the program is to increase the near term momentum of the economy by fostering more accommodative conditions. while the purpose of the rate guidance is to give information about future circumstances under which the committee would contemplate reducing accommodation. i would emphasize that a decision by the committee to end asset purchases whenever that point is reached would not be a turn to title policy. while that circumstance to committee would no longer be increasing policy accommodation, its policy stance would remain highly supportive of growth. only at some later point would the committee begin moving accommodation through rate increases. moreover as i have discussed today the decisions to modify the asset purchase program and rate increases are tied to different criteria.
in conclusion, the actions today are part of our ongoing efforts to support economic recovery and job creation while maintaining price stability. as i have often stressed however monetary policy has its limits. only the private and public sectors working together can get the u.s. economy fully back on track. in particular, it'll be critical that fiscal policy makers come together soon to achieve longer term fiscal sustainability without adopting policy that could derail the ongoing recovery. thank you. i would be happy to answer your questions. >> mr. chairman, steve leisman from cnbc. i guess i have a lot of questions but i will just offer up two here. why are there different targets for qe and for the funds rate? what does that achieve? secondly, what good is a target if you have to reference calendar dates in the statement itself which is the thing you
got away from. you had to point out that it is not different from october. do you have to keep doing that from now on to make a clear? and just thirdly, i know i said two. but another paragraph after that that said, that said it is not just target. it is something else. so it is not clear to me what good the targets are if you have to reference a calendar date and then say in the next paragraph it is not targets. >> so first, as i said, asset purchases and the rate increases have different objectives. the asset purchases are about creating near term momentum, trying to strengthen growth and job creation in the near term and increases in the federal funds rate target when they occur are about reducing accommodations. two very different objectives. secondly, asset purchases are a
less well understood tool. we have -- well be learning over time about how efficacious they are. what costs they may carry with them in terms of unintended consequences that they might create and we will see what else happens in the economy that can effect, you know, the level of unemployment for example that we hope to achieve. so for that reason, as i discussed in opening remarks, we decided to make the criteria for asset purchases qualitative at this time. because we have a number of different things that we need to look at as we go forward. rate increases, by contrast, are well understood and we understood the relationship between those and the rate increases and the state of the economy. so we have been able to give somewhat more quantitative were more specific guide nuns that respect. with respect to the date, and transition, today, we wanted to make clear that change in
guidance did not -- happens to be the chase it doesn't change to mid 2015 kpexpectation. going forward we will drop the date and go forward on the conditionality and that has, i think, a very important advantage. that if news comes in, that the economy is stronger or weaker, then financial markets and the public will be able to adjust their expectations for when policy tightening will occur without the committee having to go through a process of changing its date in a nontransparent way. i think that's -- that's beneficial. does that cover -- >>. [ inaudible ] >> mr. chairman, what prompted the committee to make the decision at this particular time to specify targets?
and by taking an employment rate quite low to compared to currently, does that shift the balance of priorities in terms of your dual mandate, closer more in the direction of reducing unemployment rather than inflationary pressures? >> very good question. >> we took the change today after a big good bit of discussion. we have a discussion of the threshold approach at our last meeting and we felt it was ready to go, ready to put out. we -- while there are different views and aspect of the threshold approach, there is a lot of agreement that having a more complicit connection between rate policy and state of the economy, was more transparent and more helpful to the markets and public than date
base guidance. and there for there was a general view at some point at least that we should switch to that kind of guidance. we do hope it'll be more helpful and give markets for information about how we are going to respond going forward. it is not a change in our relative balance, weights towards inflation and unemployment by no means. first of all, with respect to inflation we remain completely committed to the 2% longer run objective. moreover, we expect our forecast as can you see from the summary of economic projections, our forecasts is that inflation will remain, despite this threshold of 2 1/2, that inflation will remain at or below 2% going forward. and so, and finally, the thresholds that we have put out, are entirely consistent with our long standing views on what the rate path has to be, what the
path of interest rates has to be, in order to achieve improve many in the labor market while keeping inflation close to target. so i think we -- both sides of the mandate are well served here. there is no real change in policy. what it is instead is an attempt to clarify the relationship between policy and economic conditions. >> could i ask also, given that the -- your economic projections are all the more important now, that you have specified these targets, is it difficult to put forward these projections now given the uncertainty over the fiscal cliff? how sort of plastic are these? >> are you talking about the sep projections? >> yes. >> clearly the fiscal cliff is having effects on the economy. even though we are not yet even reaching the point of the fiscal
cliff potentially kicking in, it is already affecting decisions by creating uncertainty or pessimism. we saw what happened recently to consumer sentiment which fell, presumably in part because of concerns about the fiscal cliff. so clearly, this is a major risk factor and major source of unsinnerty about the economy going forward. i would suspect and although, the par participants don't all make this complicit, but i would suspect what they are assuming in projections is that the fiscal cliff gets resolved, and some intermediate way whereby there is still some fiscal drag but not as much as implied bit entire fiscal cliff. i think that is probably the underlying assumption that most people took when they made their projection. but you are absolutely right, there is a lot of uncertainty right now. and if the fiscal cliff situation turns out to be
resolved in a way very different from our expectations, i'm sure you would see changes in the forecast. [ inaudible ] >> thank you very much, mr. chairman. could you talk about whether the decision to maintain the monthly bond purchases at 85 billion a month is ramping up or additional easing to fed policy. because you are now adding more to the size of balance sheet. and also, you know, you talked about maintaining the asset purchases until you see substantial improvement in the labor market. and you want it take a quote different approach, but you also have the 6.5% inflation threshold out there as well. could you take about what sort of evidence you would see to make you change the pace or slow the pace of purchases. >> snirs pafirst part of your q is -- >> is this an additional
stimulus? >> no. i think this is a continuation of what we said in september. you recall in september, we expressed dissatisfaction with progress in the labor market. that point we began the $40 billion per month of mbs purchases and said that unless we saw substantial improvement and outlook for labor market we would undertake additional asset purchasesor other actions. that's what we've done today. is simply follow through with what we said we would do in september. i don't think we have relative to last month, i don't think we have significantly added to accommodation. the reason is at least in my view and many of my colleagues is mix of assets on the balance sheets. on the asset side of the balance sheet. so what is important is the fact that we are acquiring treasury securities and mbs taking those
out of the market. forcing investors into closely related assets. not so much in the size of the balance sheet per se. in my judgment, the amount of stimulus is more or less the same. just continued. follow through from what we saw in september. in terms of criteria, again, what we have done is announced an initial amount of 85 billion a month of purchases. we are prepared to vary that as new information comes in. for example, if the economy's outlook gets noticeably stronger we would presumably begin to ramp down. the level of purchases. but again, the problem with giving a specific number is that there are multiple criteria in which we make this decision. we are looking at the outlook for the labor market which is important but also at other
factors that may effect the outlook for the economy. for example, i hope it won't happen but if the fiscal cliff occurs, as i've said many times, i don't think the federal reserve has the tools to offset that event and in that case we have to temper our expectations about what we can accomplish. like wise, we are is looking at the efficacy and cost of our program. and if we find that we expect to be efficacious, but if we find it is not working as well as we hoped or cost are not what we anticipated, that also has to be taken into account as we thought about it. we ourselves don't precisely know what would define substantial improvement. but as long as the costs and other concerns do not emerge, we will be looking for you know, something that is substantial in terms of a better job market. >>. [ inaudible ]
>> peter with bloomberg television. mr. bernanke, if i could follow up on your last response there, given on the fiscal cliff, it s it possible if policy makers didn't agree to a deficit deal by the end of the year and we were to two over the fiscal cliff that size of the asset purchase could indeed grow in response to that. and more specifically the coined the phrase fiscal cliff. and i want to get your take on whether you feel it is still the most appropriate language to describe what will happen at the againing of the year. some are some americans alarmed by the term. do you feel it is appropriate with the fiscal contraction that would come if there is no deal? >> well, the first part of your question is, it is the economy went off the fiscal cliff, our assessment, cvo, all think there are adverse effects on the
economy and unemployment rate. so on the margin we would try to do what we could. perhaps increase a bit. but again, i i want to be clear that we cannot offset the full impact. it is too big given tools and limitations on policy tool kit at this point. on terms of the terminology, well, and people have different preferences about what they want it call things, i think it is a sensible term because i think of the fiscal policies providing support to the economy, if fiscal policy becomes contractionnary, i think the economy will go off a cliff. i think it is reasonable to be concerned about this. i don't buy the idea that a short term descent off the cliff would be costly. it would be costly. in fact we are already seeing
costs. why is it that consumer confidence dropped so sharply this week. why is it that small business confidence dropped so sharply? why are the market volatile? why is business investment among its weakest levels during recovery. i think all of these things, at least to some extent could be traced to the anticipation and tern about the fiscal cliff. and i think that you know, we don't know exactly what would happen. but i think there are certainly a risk that it could be serious and therefore, i think very important and i think the best thing that congress could do is find resolution that achieves long run fiscal sustain ability. which is absolutely critical for a healthy economy. but also, avoids derailing the recovery, which is currently in progress. >> john from wall street
journal. mr. chairman, i want to try to square up some numbers that the threshold that you announced today for when rate hikes might start at 6.5%. the committee's assessment of the longer run unemployment rate is 6% or perhaps a bit lower. and the longer run feds rate is 4% according to these projection. when the fed does raise interest rates down the road, it might have to move quickly to get to some equilibrium feds rund rate. is that the case and more generally can you talk about what this framework that you set up today says about the exit strategy you laid out some time ago and whether that is a evolving or changing. >> that's a good question. first of all, we don't have a precise estimate of the long run
sustainable unemployment rate. in the summary of economic projections today as has been the case for a while, is 5.2 to 6.0%. so it could be well less than 6.5%. that gives us some time. but anticipation is that the removal of accommodation, after the take off point wherever that occurs, would be relatively gradual. i don't think we are looking at a rapid increase. that depend on where inflation is and other conditions. but it is -- the path that we're basing these numbers on is one that assumes first of all, as you anticipated, assumes an increase in funds rate first occurring sometime after unemployment goes below 6.5%. but does not necessarily assume a rapid increase after that.
what we said in our statement is that we would take a balanced approach. once we get to that point, we may or may not raise rate that point. we will look at the situation. but assuming that inflation remains well controlled, that the increase in rates would be moderate, this is consistent. the exit strategy that we put out, is consistent with our statement today because the exit strategy was primarily about how we would normalize the balance sheet over time. and at this time, we have not made any changes in that and we believe that some increase in the size of our balance sheet is consistent still with that general sequence that we laid out in the minutes a year and a half ago. that being said, if the balance sheet grows by enough, we may have to reconsider the pace or timing of that.
but i don't see any changes that would radically change the time to normalization or time to exit. >> thank you. i'm going to continue the two-question trend, and ask, first, from the fiscal cliff, sounds like would you prefer a fiscal balance of fiscal consolidation and support for recovery. but if people in congress can't do that that in the next couple weeks, do you think fiscal consolidation is preferable to going over the cliff and monetary actions today, can you give us more color on how you set thresholds and what they were and what alternatives were and you who you weighed various alternative but similar policies? >> sure. i'm hoping that congress will do the right thing on the fiscal cliff. there is a problem about kicking the can down the road.
it might have short term impact on the recovery but could create concerns about our longer term fiscal situation. and i don't want to see that. i think for the best -- it is in the best interest of the economy to come to a two-part solution if you will. part one is to modify fiscal policy in a way that doesn't create enormous head winds for the recovery in the near term and part two is to at least take important steps towards achieving a framework at least by which perhaps for the further negotiation. the congress administration can achieve a sustainable path for fiscal policy. both parts are very important. i don't think that we could consider these negotiations a success unless both of them happen. [ inaudible ] >> no, i think they are equally important. on the threshold numbers, these
numbers are based on substantial analysis done by staff, both here and at the reserve banks. trying to assess under so-called optimal policy or in the best policy we can come up with, what would the there rate path look like and how would it be connected or correlated with changes of unemployment or inflation. and when we do that analysis we find that best interest rate path, as best as we can determine it, based on models and analysis which is imperfect has rates remaining low until unemployment rates drop below 6.5%. and projects that -- we put in the half percentage point above the 2% goal is the kind of protection against any problem with price stability. our projection, our actual
forecast suggest that inflation will not go there. inflation staying around 2% which is consistent with our longer term objective. >> if we get important new information about the structure of the economy. it is possible but i consider it relatively unlikely and this is one of the advantages of this approach over the date based approach. if information comes in which says the economy is stronger or weaker than we expected, that would in principle require a change in the date. but it doesn't necessarily require a change in the thresholds because that date adjustment can be made by markets just simply by looking at their own forecast of when unemployment will cross the line and the behavior of inflation. [ inaudible ] >> scott spory from cnn, sir. >> when you were appearing on "60 minutes" one of the things
that happened is you visited your own old hometown. you talked about how the economy had affected people that you grew up with and affected the people down there. there are a lot of just regular people like that who are out in the countryside wondering what really happens to them if we do go over the federal cliff. taxes go up. spending goes down. do they need to look for recession? are employers going to really cut back on employment, do you think? what do people out there really need to worry about and prepare for when it comes to actually going over that fiscal cliff, if the folks in washington can't get their act together? >> well, i come from a part of south carolina which has been economically challenged for quite a long time and remains so. certain parts of south carolina have developed pretty strongly.
but the part where i come from, mostly agricultural, mostly manufacturing, has a very high unemployment rate, high foreclosure rate and people are having a hard time there. i've visited there a few times since i became chairman. so part of the reason that we are engaging in these policies is to try and create a stronger economy, more jobs, so that folks across the country, the o where i grew up, you know, will have more opportunity to have a better life for themselves. that's extremely important, and i think it's very important that we not just look at the numbers. it's easy toe look at unemployment rate and say, well, it's 0.1%, 0.2%, one-tenth many, many people are represented there so it's very, very important to try to keep in mind the reality of unemployment, of foreclosure, of weak wage
growth, et cetera, so we always try to do that. i don't want to -- it's always a delicate balance. you don't want to scare people, and i -- i actually believe that congress will come up with a solution, and i certainly hope they will, but as -- as many analysts, not just the fed have pointed out, if the fiscal cliff was allowed to occur and certainly if it were sustained for any period, it could have a very negative effect on hiring, jobs, wages, economic activity, investment and, of course, the consequences of that would be felt by everybody but certainly by those in areas like where i grew up that are relatively weak economically and would no doubt feel the greater brunt. it's exceptionally urgent and important that congress and the administration come to a sensible agreement on this
issue. >> okay. sure, i had a followup. i'm not going to ask you whether we're in a bond bubble, but obviously the new guidance that you've given in the fymc statement is going to give a lot more clues to people who own bonds about when they might start lightening up their bond portfolios and changing the composition of what they own. was concerns about information about bond prices and things happening in a big hurry in terms of some sort of a bubble popping? was that a consideration in adding this transparency? >> i wouldn't say it was an important motivation for adding transparency. i think transparency has a lot of value, but it is a fact that this greater clarity will help markets better predict how bond yields will behave.
as we go forward in time, if the economy continues to strengthen, as we hope, as the exit comes closer for the federal reserve, then you would expect longer-term bond yields to begin to rise, and the more information we can provide to markets about the conditionality under which the fed would consider moving accommodation, the better information they will have about the likely path of bonds, and that will allow for a smoother adjustment. so i think that's a positive aspect of this communication. i wouldn't say it was the major reason. the major reason is to -- is to give the markets and the public more transparency about what's determining our policy, but that is one potential advantage. >> robin harding from "the financial times." mr. chairman, you said a moment ago that these thresholds are
based on an analysis of optimal policy n.optimal policy path that vice chair yellin laid out in her speech a few weeks ago it showed the first interest rates rising in early 2013 and rates rising very slowly after that. is that the policy that the fed is now following? and secondly, if i may, you've referred to a number of inflation forecasts in your introductory remarks. in that case, how will we ever know that the inflation threshold has been hit? thank you. >> so the kind of optimal policy path that vice chairman yellin showed is indicative of the kinds of analysis we've done. we've run it for a variety of different scenarios and differed models and so on, but the general character of that interest rate path, ie, that it stays low until unemployment is in the vicinity of 6.5 or a
little lower and then rises relatively slowly, which goes back to the question that was asked earlier that it doesn't involve a rapid removal of accomodation after that point is reached, that is consistent with that kind of analysis, and that's the type of analysis that was not the only thing we looked at but was informative in our discussion. you'll note also in that kind of policy path of the type that she discussed that inflation stays essentially at 2 or very close to 2. in terms of inflation forecasts, what the committee will do on a regular basis is include in its statement its views of where inflation is likely to be a year from now. for example, currently we already say, you know, we expect inflation to run at or below the committee's objective in the longer term. the intellectual exercise will
be doing and asking ourselves if we maintain low rates along the lines suggested by this policy would we expect inflation to cross the threshold or reach that -- reach that level. now, it's very important that the public, the media, the markets find our projections credible obviously, and so for that reason, you know, we will be referring extensively to publicly available information such as various measures of inflation. i mentioned some in my opening remarks, outside forecasts, the break-evens from inflati inflation-protective bonds, et cetera, so if our outlook deviates in any sense in a significant way from sort of what all these things are saying, at a minimum it will be incumbent on me and the rest of us to explain that. but my expectation is that our
projections will be broadly consistent with public views, public information, and so i -- i think we can manage the credibility issue. but, again, just to be clear, the projection that matters for our determination is the one that the committee collectively comes up with. >> so you've articulated more clearly than ever your commitment to reduce unemployment, but you've also said that you're not actually doing anything more to achieve that goal, that you still expect it to be three years away, that you're disappointed with the pace of progress and that inflation is not the limiting factor. what is the limiting factor? why is the fed not announcing today additional measures to reduce unemployment? what would it take for you to get them? >> well, we took -- the question was whether this was something new relative to september. i think september was the date where we did do a substantial increase in accommodation. at that point we announced our
dissatisfaction with the stated labor market and the outlook for jobs and said we would take further action if the outlook didn't improve, and what we've done today is really just following through what we said. so i would say that, you know, looking at it from the perspective of september, that we have in fact taken significant additional action to provide support for the recovery and for job creation. the reason -- one of the considerations that i've talked about, given that we're now in the world of unconventional policy that has both uncertain costs and uncertain efficacy or uncertain benefits, you know, that creates a somewhat more complicated policy decision than the old style of just changing the federal funds rate. you know, there are concerns that i've talked about in these -- in these briefings
before that if the balance sheet gets indefinitely large, that there would be potential risks in terms of financial stability in, terms of market functioning, and the committee takes these risks very seriously. and they impose a certain cost on policy that doesn't exist when you're dealing only with the federal funds rate, so what we're trying to do here is balance the potential benefits in terms of lower unemployment and inflation at target against the reality that as the balance sheet gets bigger, that there's greater costs that might be associated with that, and those have to be taken into account. >> sir, if i can follow through. these forecasts presumably incorporate the actions taken in september so is your expectation given those actions it will still be three years until you
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