tv Key Capitol Hill Hearings CSPAN November 19, 2013 7:29pm-8:00pm EST
public initially expected at first, the committee employed qualitative information to deliver that message. they decided it would be appropriate for the federal funds rate to be near zero for some time. it changed the formulation in march 2009 to an extended period. such language did not convey the committee's intentions. the committee introduced a specific date into its guidance, stating that conditions would likely warrant keeping the federal funds rate near zero at least through 2013. this guidance was more precise than the kwaulg tative language that the committee had been using, and it appears to have been effective in communicating the fomc's commitment to the policy.
interest rates and survey measures moved in ways broadly consistent with the guidance all now the date based forward guidance appears to have affected the expectations as desired. it did not explain how future policy would be affected by changes in the outlook. an important limitation. indeed, the date and the guidance was pushed out twice in 2012, first in late 2014, and then mid-2015, leaving the public unsure about weather and under what circumstances, further changes to the guidance might occur. in december of last year, the fomc addressed this issue, by tieing its forward guidance more directly to its economic objectives. introducing so-called state contingent guidance, the committee announced for the first time that no increase should be anticipated so long as unemployment remained above 6 and a half%, and inflation
expectations remain stable and near target. this formulation provided greater clarity about the factors influencing the committee's thinking, about future policy, and how that thinking might change as the outlook changed. as my colleagues and i have frequently explained, the conditions stated in the guidance are thresholds, not triggers. crossing one of the thresholds will not give rise to an increase in the federal funds rate target. instead it will signaling only that it is appropriate for the committee to begin considering whether an increase in the target is warranted. this threshold formulation helps explain why the committee was willing to express the guidance bearing on the babe market in terms of the unemployment rate alone, instead of following its usual practice of broad range labor market indicators. the unemployment rate, which despite some drawbacks in this regard is probably the best single summary indicator of the state of the labor market.
is sufficient for defining the this remember hold given by the guidance, however, after the unemployment threshold is crossed, many other indicators become relevant to a comprehensive judgment of the health and labor market. including such measures as payroll employment, the participation rate and the rates of hiring and separation. in particular, even after unemployment drops below 6.5%, and so long as inflation remains well behaved, the committee can be patient in seeking assurance if the labor market is sufficiently strong before considering any increase in the target for the federal funds rate. because of the severity of the recession, and the disruptions of financial markets and because short term interest rates were near the zero lower bound it became clear early on, that more monetary accommodation would be needed than could be provided by the management of short term interest rate as lone, even with the guidance those rates would be kept low well into the fut e
future. at about the same time, it began supplementing its rate policies and forward rate guidance with large scale. specifically open market purchases of longer term u.s. treasury securities. both lsaps and forward guidance for the federal funds rate support the economy by putting downward pressure on longer term interest rates, but they affect longer term interest rates through longer channels. to understand the difference it's useful to decompose interest rates in two components. one reflects the expected path of short term interest rates. the term premium is the extra return that investors require to be willing to hold a longer term security to maturity, compared
with the short term securities for the same period. as i've noted, forward rate guidance affects longer term interest rates. lsaps in contrast, most directly affect term premiums. as the federal reserve buys a larger share of the outstanding stock of securities. the quantity of these securities available for private sector portfolios declines. as the securities purchased by the fed becomes scarcer, they should become more valuable. consequently, their yields should fall as investors demand a smaller term premium for holding them. this argument depends importantly on the assumption that the longer term treasury are not perfectly substitutable with other types of assets, in an assumption that seems well supportive in practice.
as forwards rate guidance -- short term interest rates are close to zero, the committee does not view these tools as entirely equivalent. one reason is that we have much less experience with policies designed to operate on term premiums as lsaps do. as a result, the strong majority of members believe that both the forward rate guidance and the lsaps are helping to support the recovery, we are somewhat less certain about the magnitudes of the effects of the financial conditions in the economy, of changes in the pace of purchases or in the accumulated stock of assets in the fed's balance sheet. moreover, economists do not have as good annan understanding as we would like of the factors determining term premiums, as we saw earlier this year, hard to predict shifts in term premiums can be a source of significant volatility and financial conditions.
lsaps have other drawbacks, not associated with the forward rate guidance. including comparing the functioning of securities markets and the extra complexities for the fed of operating with a much larger balance sheet, though i see both of these issues as manageable. in deciding to employ lsaps the fomc has remained attentive to the risks as well as the efficacy of this less familiar too many. the point that the committee has noted in his post meeting statements. elevated unemployment, below target inflation the harmful effects of long term unemployment and economic potential also pose significant costs and risks. and the committee has thus far judged that the balance favors the use of lsaps. between november 2008 and june 2012, asset purchase programs.
in each case, like the use of date based forward guidance, announcing a program of predetermined size and duration has advantaged and disadvantages. a program of fixed size cannot so easily adapt to the changes in economic outlook in the need for policy accommodation. in announcing its fixed size programs, the fomc did state a general willingness if needed and indeed has followed through on that promise. such statements left considerable uncertainty in an existing program or the introduction of a new one. in a step roughly analogous, in september 2012, they announced
the size of the program would not be fixed, but linked to the committee's objectives. in particular, the committee initiated purchases at the rate of $40 billion per month and stated its intention to continue purchases until the outlook for the labor market improved substantially in a context of price stability. in december 2012, the fomc ad d ed purchases of $45 billion per month to the new program, bringing the monthly purchase rate of $85 billion per month where it remains today. as i noted the security set a criteria as the condition for ending the new purchase program. the committee also signaled its expectations that would end the purchases and return to an emphasis on policy and forward
guidance before it had fully attained its dual mandated objectives. stating, the committee expects a highly stance will remain appropriate for a seasonal time after the asset purchase program ends and the economic recovery strengths. the reason for the sequencing choice again, was a greater uncertainty of the cost relative to the more familiar tool of managing the current short term interest rate and through forward guidance of short term interest rates. moreover, to the extent that the use of lsaps engenders risks, one might expect a tradeoff to become less favorable as the federal reserve's balance sheet expands. having seen progress in the labor markets since the beginning of the latest asset purchase program in cement 2012, the committee agreed to provide more comprehensive guidance about the criteria that would
inform future decisions about the program. consequently, in my press conference following the june fomc meeting, i presented a framework linking the program to the fomc's economic outlook. in particular, i noted the committee's expectation at the time that the improvements in the job market would continue, supported by a moderate pickup in growth that would support those gains. the committee additionally would likely begin measured reductions in the nace of asset purchases later in 2013. if the economy evolved as anticipated, the end of purchases would occur around midyear 2014. i also emphasize that the path of purchases would depend on incoming data and could be slower or faster than envisioned in the mobile scenario, indeed i noted that the pace of purchases could be increased for a time if warranted.
the framework i discussed in june implied that substantial asset purchases over subsequent quarters were likely with even more purchases possible if economic developments proved disappointing. however, following the june meeting and press conference, market yields move sharply higher. between the fomc meetings in june and september, the ten-year treasury yield rose about 3/4 of a percentage point and rates increased by a similar amount. financial market movements are difficult to account for even after the fact. the three main reasons seemed to explain the rise in interest rates over the summer. the improvements in the economic outlook warranted somewhat higher yields, a natural and healthy development. >> second, some of the rise in rates reportedly reflected an unwinding of levered positions. positions that appeared to have been premised on an indefinite
asset losses and the rise in volatility. although it brought with it some tightening and financial conditions, this unwinding in the term premiums may have had the benefit of reducing future risk in a particular of lowering the probability of an even sharper market correction at some later time. third, market participants may have taken the indication in june as indicating a general lessening of the committee's commitment to maintain a high policy objectives. the fomc's forward guidance for their forward funds rate have become less effective after june, with market participants pulling forward at the time, at which they expected the committee to start raising rates in a manner inconsistent with the guidance. to the extent that this third factor of received reduction in the fed's commitment to meeting its objectives contributed to
the fomc's decision came as a surprise to some market participate abilities. it appears to have strengthened the committee. in particular, following the decision longer term rates fell. and expectations of short term rates derived from market prices, showed and continued to show a pattern more consistent with the guidance. in coming meetings and evaluating the labor market we'll continue to consider acumulative process and gains. we have seen meaningful improvement in the labor markets since the asset purchase program was announced in september 2012. at the time, the latest reading was 8.1%, and both we and most private sector economists were projecting slow reductions in the coming quarters. recent reports on payroll employment had been somewhat disappointing. since the program was announced, the unemployment rate has fallen by 0.8%age points and 2.6
million payroll jobs have been added. looking forward, we will continue to monitor the incoming data. as reflected in the latest summary of economic projections in the october fomc statement. the fomc expects that labor market conditions will continue to improve, and that inflation will move toward the 2% objective over the medium term. if these views are supported by incoming information, the fomc will likely begin to moderate the pace of purchases. however, asset purchases are not on a preset course, and the committee's decisions about their pace will remain contingent on the committee's economic outlook. the committee will take into account the efficacy of the program. when ultimately asset purchases do slow, it will be because the committee has progressed sufficiently for -- the economy has progressions sufficiently for the committee to rely onrait policies, the associated forward guidance and the substantial
continued holdings of securities to maintain progress toward maximum employment and price stability. in particular, the target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end perhaps well after the unep employment this remember hold is lost. and the data supports the beginning of the removal of the policy accommodation. i began my time as chairman with the goal of increasing the transparency of the federal reserve and of monetary policy in particular. in response to a financial crisis, the feds monetary policy communications have proved a far more important tool that evolved in different ways than it would have envisioned eight years ago. the economy has made significant progress since the depths of the recession. however, we are still far from where we would like to be, and consequently, it may be some time before monetary policy returns to more normal settings.
i agree with the sentiment expressed by my colleague janet yellin at her testimony next week. that the surest path to a more normal approach is to do all we can today to promote a more robust recovery. the fomc remains committed to maintain a highly accommodative policy for as long as needed. communication about policy is likely to remain a central element of the federal reserves efforts to achieve its policy goals. thank you. [ applause ]
>> it occurs to me that most of you are sitting there thinking, wow! there's chairman ben bernanke up in with some guy. because i forgot to introduce myself earlier, so i'll do that. i'm bob graboyes, senior research fellow at george mason university, and i've been fortunate to be chairman of the board of national economists club this year. i will gratefully relinquish that shortly, but it's been a great honor to work with all of these folks.
let me bang together a couple parts of my past. i'm a health care policy specialist. but i also spent 12 years as a federal reserve economist before that, and worked in commercial banking and small business. combining all those things together could, if i were so inclined, deprive me of sleep at night. i worry about the sustainability of medicare, medicaid, other health care programs, now including the affordable care act. we have a ton of other unfunded liabilities, including social security. i wonder if you could comment on the country's long run deficit issues and fiscal sustainability. >> sure. fiscal sustainability is critically important for any country, certainly for the united states as well. as a health care economist, you're certainly aware of what's happened to health care costs
over the past few decades. the united states has a higher share of its gdp going to health care than any other advanced economy, and we don't get the return on that one would expect. given that that to put those tw things together, and you know, we will have some real pressures on the fiscal capacity going well -- going well into the future. i say parenthetically, though, that the last few years health care costs have risen more slowly and will be interested to find out whether that's a temporary phenomenon or something more long lasting. but clearly, we need to begin to think about how to address not just fiscal sustainability in the long run, which is tied, as i said, very much to aging and health care costs. but how to address the efficiency of the health care system, the quality, the system, access to the system, so on in our current economy, as well. so these are important issues that you're working on, and i
know you're having a good time with all the current debates that are happening. i guess i would say in terms of fiscal policy, i think it's important to point out that what is actually happening in fiscal policy now is that most of the tightening we're seeing is actually very near-term. so in 2013 we saw increase in taxes, elimination of the payroll tax holiday, reduced unemployment insurance, the sequester, other cuts in spending, all these things that were taking effect in 2013, which put together, according to the congressional budget office, probably not something like a point and a half off the growth rate in 2013. and no doubt hundreds of thousands of jobs. so the federal reserve is in a position of trying to support the recovery, and fiscal policy is not working in the same direction, which is a problem. so, my -- my recommendation, for what it's worth, is to focus more on the longer-term fiscal issues, which need to be
addressed, and which will be more easily addressed if we begin well in advance, and to be a little bit less restrictive in the very near-term in order to give the economy's recovery a better chance to -- to bring us back to a healthy state. >> thank you. the next question, i should -- i must recognize that ed keane and pete davis really were in charge of putting to the, sorting through all of the questions we came -- came to us, and this question came from them. in recent months, the fed has strived to communicate a distinction between the criteria for adjusting the pace of quantitative easing, and the criteria for determining the fed funds target. given the recent volatility in financial market behavior, how much has the fed adjusted its thinking on how specific it can be in communicating its policy intentions with regard to both
qe and fed funds? i hope that was comprehensible. how do they keep these things separate? >> well, basically you just asked me to repeat my speech. >> yes, yes, i did. >> that was the message of the speech. >> yes, i did. i did. >> the basic -- the basic point that i was trying to make is that we do have two tools, that they have -- they work in somewhat different ways. they have different costs and benefits, different costs and efficacy, and so we're using them in a -- not in a completely parallel way. so as i discussed in the remarks, you know, we have a set of criteria for the asset purchases, which relate to a substantial improvement in the outlook for the labor market relative to september 2012. you can think of that as a first stage of the booster rocket, to move our economy forward. but even when asset purchases do eventually end, as when those criteria are met and asset
purchases end, we expect that rates will remain low past the unemployment thresholds, and beyond, until such time as there is good evidence that the economy can sustain higher interest rates. until that time, we want to maintain a highly accommodative policy in order to make sure that we do meet both our employment and inflation objectives, both of which are calling for more accommodative policy. i think, while, as i said in my remarks, over the summer, the markets tended to conflate those two tools. i think to some extent that better differentiation is happening now, and the market's beginning to appreciate that they are separate too tools, and that the mix of those tools will change somewhat over time. but the fundamental commitment of the fomc to meeting its objectives, which is going to require sustained accommodation policy remains, and it's the
most fundamental point that i wanted to -- wanted to make. >> wonderful. got to give them the glory, and the readers digest condensed version of the speech. so that is great. number three from brian roth and david hugh. has the declining labor participation rate affected fed policy should we adjust our definition of what constitutes full employment? >> so the labor participation, labor force participation rate has been declining for a number of years. in fact, some fed staffers wrote a very nice paper about the trend in participation before the crisis. and a number of reasons why that's happening. including the aging of our society, so more people are of retirement age. the fact that women are not coming in to the labor force at the same pace as they were early on. some trend decline in
participation by prime age men. some additional school, more people are going to school for longer. so a whole variety of factors are causing participation to decline over time. and, again, this is a trend that existed before the -- before the crisis, before the recession. now, at the same time, it's probably also the case that there are some people who are outside of the officially measured labor force, because they -- their view, perhaps correctly, is that the labor market is too weak and that they're unlikely to find work. and if they could -- if they thought they could find work they might come back in to the labor force. so these people who are temporarily outside the labor force, because they think the labor market conditions are too weak, you could think of that as being the cyclical component of the decline in labor force participation. so, for the purposes of trying to make monetary policy, you know, the trend is beyond our
control. what we'd like to do is try to make use of our labor resources and eliminate the slack in the labor market. we're going to have to try to make a judgment as we go forward about how much of the decline in labor force participation is trend and how much of it reflects temporary slack. we'll get some clues when the economy strengthens enough, when labor market strengthens enough, that we begin to see people coming back in to the labor force. that will give us some evidence about how much of this declined labor force participation is cyclical, how much is secular. but again, as i mentioned in my remarks, in trying to judge the health and labor market we won't be looking at just the unemployment rate. we'll be looking at other factors, too, and cyclical component of the decline of participation is one of the more difficult things to measure, but it's going to be one of the things we'll be considering as we evaluate the state of the labor market. >> the next one is from brett
peck and gene sterling. how concerned are you about the growing wealth and income disparities, and what should be done about them? >> well, like labor force participation, this is a long-term phenomenon. income and wealth disparities have been increasing in the united states, at least since the late '70s, or perhaps even longer. the degree of inequality in the united states is now relatively high. higher than most other industrial countries. there are a lot of factors. it's a complicated ten on nom. economists don't entirely agree on why this has been happening. certainly trade and globalization is part of the explanation. on the one hand, if you have low skills, then, in a open globalized world, you're effectively competing with many, many other workers with very low skills around the world, and obviously we don't have many jobs in the united states anymore that are low-skill
manufacturing jobs. on the other hand, if you're a highly skilled person, then you have a global market. and you can earn the higher return from your skills. likewise, we've seen technical change exhibiting what labor economists call skill bias, which means that the returns from the technical change accrue mostly to participate with higher skills. people can use computers. people can use robots and the like. and in that respect, even for a given distribution of educational outcomes, income distribution will widen, as the higher returns accrue to people who have the appropriate skill. so, it's hard to say entirely how to solve it. it's not a problem that can be solved quickly, but clearly trying to break down barriers to social mobility, trying to increase opportunities for training acquisition of skills, education, from a very young age, all