JEFFREY BROWN: And we turn to the Federal Reserve on an unusual day of both substance and appearances.
BEN BERNANKE, Federal Reserve Chairman: Good afternoon.
JEFFREY BROWN: It was a standard greeting but hardly a standard setting, as Federal Reserve Chairman Ben Bernanke held the first regularly scheduled news conference in the central bank’s 98-year history.
The Fed has long been seen as a secretive, even mysterious institution, pulling the levers of the economy Wizard of Oz-like from behind a magic curtain.
Bernanke said he hopes to change that.
BEN BERNANKE: I personally have always been a big believer in providing as much information as you can to help the public understand what you’re doing, to help the markets understand what you’re doing, and to be accountable to the public for what you’re doing.
Now, of course, the Fed didn’t do this for a long time, and I think the counterargument has always been that if — there was a risk that the chairman speaking might create unnecessary volatility in financial markets or may not be necessary, given all the other sources of — of information that come out of the Federal Reserve.
It was our judgment after thinking about this for some time that, at this point, the additional benefits from more information, more transparency, meeting the press directly, outweighed some of these — some of these risks.
JEFFREY BROWN: Bernanke has slowly opened up the Fed since taking over as chairman in 2006. He’s been interviewed twice on “60 Minutes,” held two informal question-and-answer sessions at the National Press Club in Washington.
And in 2009, he sat down with Jim Lehrer in Kansas City for a public forum about the Fed’s response to the financial crisis. And it’s the financial crisis and its aftermath that have dominated his tenure and brought both praise for helping stem a complete meltdown and criticism for not sufficiently speeding up economic growth and job creation.
At today’s press conference, Bernanke was asked why the Fed was not doing more to reduce high unemployment. He defended the central bank’s actions to date.
BEN BERNANKE: In terms of trying to help this economy stabilize and then recover, the Federal Reserve has undertaken extraordinary measures. Those include, obviously, all the steps we took to stabilize the financial system during the crisis, again, many of which were extraordinary measures taken under extreme circumstances.
JEFFREY BROWN: Bernanke also defended a controversial program known as quantitative easing, or QE2, a Fed program to buy $600 billion of government bonds in an effort to spur lending and expand business.
Today, the Fed announced the program will end as scheduled in June.
BEN BERNANKE: I do believe that the second round of securities purchases was effective. We saw that first in the financial markets.
The way monetary policy always works is by easing financial conditions, and we saw increases in stock prices. We saw reduced spreads in credit markets. We saw reduced volatility.
We saw all the changes in financial markets, and quite significant changes, that one would expect if one was doing an ordinary easing of policy via a reduced federal funds rate.
JEFFREY BROWN: Chairman Bernanke said today that short-term interest rates would remain near zero. On the key question of inflation, he acknowledged a rise but one that he said should be temporary.
BEN BERNANKE: As I have noted, inflation — headline inflation is at least temporarily higher, being driven by gasoline prices and some other commodity prices. Our expectation is that — that inflation will come down towards a more normal level, but we’ll be watching that carefully.
JEFFREY BROWN: The Fed chairman ended today’s press conference with a message seemingly aimed at the public at large worried about the pace of the recovery.
BEN BERNANKE: It’s very hard to blame the American public for being impatient.
Conditions are far from where they — where we would like them to be. The combination of high unemployment, high gas prices and high foreclosure rates is a — is a terrible combination. A lot of people are having a very tough time.
So, I can certainly understand why people are impatient. And I do think that the pace will pick up over time. And I am very confident that, in the long run, that the U.S. will return to being the most productive, one of the fastest growing and dynamic economies in the world.
And it hasn’t lost any of the basic characteristics that made it the pre-eminent economy in the world before the crisis. And I think we will return to that status as we recover.
JEFFREY BROWN: Bernanke now plans to hold regular news conferences following the Fed’s meetings on monetary policy. The next one is scheduled in June.
Wall Street rallied on Bernanke’s remarks about the economy. The Dow Jones industrial average gained 95 points to close just below 12,691. The Nasdaq rose 22 points to close near 2,870.
And more now about the Fed’s policy and presentation from Joseph Stiglitz. He is a Nobel Prize-winning economist and professor at Columbia University Business School. And Matthew Slaughter, who served on the Council of Economic Advisers under George W. Bush, he’s now associate dean at the Tuck School of Business at Dartmouth.
And, Matthew Slaughter, since this was so unusual, I think I’ll reverse the normal NewsHour approach and look at appearances first. Why is Bernanke doing a press conference? And who do you see him speaking to?
MATTHEW SLAUGHTER, Dartmouth College: Well, I think the chairman connected today’s press conference for two reasons. One is, historically, if you look at his academic work, a lot of his research had shown the value of transparency for central banks in general.
And the second reason, more specifically, is in the wake of the financial crisis and the ongoing sluggish recovery, I think he feels the need to try to speak to different audiences that are concerned about how U.S. monetary policy is being conducted.
And so, today, he was speaking to business and finance leaders. He was speaking to policy-makers, but at least as importantly, I think the third group, he was speaking to American workers and their families to talk about the concerns that they have about the recovery.
JEFFREY BROWN: Joseph Stiglitz, what do — what do you see? Why is he doing it? Who is he speaking to?
JOSEPH STIGLITZ, Columbia University: Well, I agree with exactly what Matt said.
But I think there’s one other element. The trust of the Fed has never been lower. It’s — it’s actually lower than even Congress. I think they understand that the Fed was asleep at the wheel, its failure in regulation. It was largely responsible for allowing the bubble to get as big as it did and then having to deal with the mess. Yes, it did save us from a disaster, but it was a disaster that they helped create.
So, they need to show that they are more open and more transparent, especially after the scandals associated with AIG, with the way that they were involved in the bailouts. The problem is, this is, you might say, a little bit of a superficial approach.
Press conferences are nice, but what was really important is freedom of information, the right of people to find out what the Fed is doing. And the Fed has been fighting Bloomberg, the press trying to get information.
We understand why, because some of the things they did don’t stand up to scrutiny. But the fact that, first, they lost in the district court, and then the appellate courts have supported the Freedom of Information Act, and they seem to be still reluctant to go along with the law of the land.
JEFFREY BROWN: This was — we should say this was an effort to get them to disclose aid to banks during the financial crisis.
But, Matt Slaughter, pick up on that. Do you think that he’s doing this feeling a lot of outside pressure to speak up and to speak more clearly because of perceived failings of policy?
MATTHEW SLAUGHTER: I think he does. I think Joe is right.
So, I think the Fed today faces a trifecta of challenges. There’s technical, economic and political challenges. They’re related to each other. The technical challenges, the chairman talked today, about when and how the Fed might start to change the size and composition of its balance sheet.
The economic challenges are, the Fed has this dual mandate by law. They’re aiming at price stability in the United States. They’re also aiming at maximum employment. And one of the things that the chairman talked about today was realizing that, as time progresses, those trade-offs between how monetary policy gets conducted and how it affects inflation versus employment, those trade-offs change.
And he talked about inflation, I think, being a bit more of a concern. But as Joe said, politically, the challenge for the Fed is many people are a lot more concerned about what they have done in the past, what the powers are of the Fed.
And so what was interesting was in a lot of the questions at today’s press conference, I think the chairman was speaking much more directly, beyond the reporters to American people again, talking about the legitimate concerns they have about what’s happening in the housing market, about slow rates of job growth, about high gas prices, and trying to convey an understanding of those concerns and get people to understand the Fed has some powers that it continues to conduct to try to alleviate those pressures on families but acknowledging the Fed is not omnipotent on those challenges.
JEFFREY BROWN: Well, Joe Stiglitz, I mean, he did talk a lot about this dual mandate and the challenge and the balancing act. But on the substance, you — what do you think about where he was on the substance today of Fed policy?
JOSEPH STIGLITZ: Well, the big issue in the minds of most Americans, not Wall Street, but most Americans, remains jobs.
He mentioned a number, for instance, that the number of jobs is 7 million below what it was in 2008 at the peak. But what he didn’t mention is in the intervening years, if things had been normal, something between 4 million, 5 million or more Americans would have entered the labor force. So, our jobs gap is not just 7 million. It’s more like 11 million, 12 million.
What was so disconcerting was the numbers that he reported about prospects of job growth, of employment — of GDP growth in the range of around 3 percent. At that pace of GDP growth, employment growth will be so slow that the number of people that are unemployed will remain high for actually years to come.
And it — the numbers that he was quoting didn’t seem to square that circle, very moderate growth, and the reality that at that moderate growth, unemployment is going to be a problem, not just this year, and not even just next year, but into 2013 and beyond.
JEFFREY BROWN: Well, so, Matt Slaughter, you were talking about him — him referring to the limits of Fed power. On the substance, do you think that the Fed has woven its way pretty well in terms of getting the balance right, in getting us — getting things on the right path?
MATTHEW SLAUGHTER: You know, I think he has.
So, one of the very interesting questions that was posed to the chairman was about long-term unemployment. And the questioner said, could the Fed do more to address long-term unemployment? And Chairman Bernanke rightly pointed out that, today, it’s still the case that about 45 percent of Americans that are unemployed have been unemployed for six months or longer.
And he talked about the cost that generates to those workers in terms of long-term skills, long-term earnings potential. But then he went on to say, you know, at some point, the Fed only indirectly can address that challenge, and the kind of government policies that are needed for that are things more related to job retraining, worker education, things that simply aren’t in the purview of the Fed.
And I think, traditionally, the main channel by which the Federal Reserve can support hiring by companies is by lowering interest rates and increasing cash flows and lowering the cost of capital for companies.
But when you look at the challenges that American business face today, if you look at large businesses, they’re doing quite well. Corporate profits are very high. Cash flows are very high. So, that’s not really something the Fed can directly change much more.
And if you look at small businesses in America, surveys of small business owners, the biggest concerns that they report are things like poor sales and also just concern about government policy and what oftentimes gets called government red tape, not the cost of capital for those businesses.
So, I think the chairman’s right that there are limits to how much a lot of these unemployment issues can be addressed directly by the Fed.
JEFFREY BROWN: All right, Joe Stiglitz, were you trying to jump in there?
JOSEPH STIGLITZ: Yes, there is one area where I think there is a — where they could do more.
The major source of job creation in any economy are small- and medium-sized enterprises. And the flow of credit from community banks, from medium-sized banks is still clogged. So, in spite of everything the Fed has talked about, that, yes, there was big bailouts for AIG, big bailouts for the big banks, the small — the flow of credit to small- and medium-sized enterprises has not been reignited.
Now, let me make two other points. One of them is that the — he talked about the deficit, the problems of the deficit, and the necessity of addressing that. He should remember, we should remember that the Fed chairmen have — were in support of the tax cut for the wealthiest Americans.
And that means that there’s less fiscal space. If we didn’t have that — remember back in 2000, the end of the Clinton administration, we had a 2 percent of GDP surplus. And it was the big tax cut that really changed the scene, and turned those surpluses into deficits.
So, the reason why this is so important is because this is now crowding out the kinds of spending for jobs-retraining programs, for infrastructure investment that would create jobs for ordinary Americans.
JEFFREY BROWN: Well, and briefly, Matt Slaughter, just tie that subject, that thought back to the — the coming out here in a press conference. He is trying to talk about things like the deficit. He did actually say that it was the most important thing facing the — facing America today.
MATTHEW SLAUGHTER: Yes, it was very telling. He said it was the most important long-term challenge that America faces.
And I think he was right in saying — I don’t think America should close our fiscal deficit tomorrow. That would create a huge problem in lowering aggregate demand and would help slow the recovery, if not destroy it altogether. But he was right in saying our elected officials need to be putting forward credible plans for medium- and long-term fiscal consolidation that creditors of the United States, both here at home and abroad, will believe, as one of the ways we need to try to support the broader economic environment in America, ultimately to help grow jobs in America.
JEFFREY BROWN: All right. We will leave it there.
Matthew Slaughter, Joseph Stiglitz, thank you both very much.
JOSEPH STIGLITZ: Thank you.