The Fed Speech: Paul Solman Channels Ben Bernanke

Paul Solman: Years ago, Saturday Night Live’s Kevin Nealon debuted a character named “Mr. Subliminal” whom he still reprises. The gimmick: Nealon talks and then occasionally, under his breath, says what he’s really thinking.

In October, President Obama economic adviser Austan Goolsbee used the technique in a stand-up comedy routine (two minutes into this clip) that earned him top prize in the 16th annual “D.C.’s Funniest Celebrity” contest.

So when Ben Bernanke delivered his major address to the annual meeting of the Federal Reserve at Jackson Hole, Wyo., Friday and it turned out to be 6,000 words — about 40 minutes of reading aloud on the NewsHour, even if I performed it at my sometimes breakneck pace — an idea occurred. In the interests of time, why not select key excerpts and give readers a sense of the overall content, plus a glimpse of the inner workings of the chairman’s mind?

Here then, a drastically shortened version of the Bernanke speech, sprinkled with asides as if he were Mr. Subliminal. All resemblance to real thoughts is purely coincidental. And, one should add, the man is a very serious scholar and deeply earnest public servant who sports rather a sly sense of humor himself.

**Chairman Ben S. Bernanke
At the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming
Aug. 27, 2010**

The Economic Outlook and Monetary Policy

The annual meeting at Jackson Hole always provides a valuable opportunity to reflect on the economic and financial developments of the preceding year, and recently we have had a great deal on which to reflect.
[Even if we’d rather not.]

I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete.
[Understatement, you may think, but I’m an understated guy in a job that demands understatement.]

For a sustained expansion to take hold, growth in private final demand–notably, consumer spending and business fixed investment–must ultimately take the lead. On the whole, in the United States, that critical hand-off appears to be under way.
[This is the optimism I’m expected to exude. What am I supposed to say: “We at the Fed are worried sick?”]

Lending standards to households generally remain tight….the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought — averaging near 6 percent of disposable income rather than 4 percent, as the earlier data showed. On the one hand, this finding suggests that households, collectively, are even more cautious about the economic outlook and their own prospects than we previously believed.
[We wanted you Americans to starting saving again, but not quite so fast.]

But on the other hand, the upward revision to the saving rate also implies greater progress in the repair of household balance sheets. Stronger balance sheets should in turn allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves.
[So, since pretty much everything in economics involves a trade-off, let’s look on the bright side: Paying off your credit card debt — “repairing your household balance sheet” — will lead you to spend again some day soon.]

The overhang of foreclosed-upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet.
[If I don’t acknowledge this, no one will believe the rest of what I have to say.]

A divide has opened between large firms that are able to tap public securities markets and small firms that largely depend on banks. Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets. For these firms, willingness to expand — and, in particular, to add permanent employees — depends primarily on expected increases in demand for their products, not on financing costs. Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes.
[Problem is, the “expected increases in demand” simply haven’t materialized, so large firms aren’t expanding and small firms unable to get financing at all. For an anecdote, see the [NewsHour story](http://www.pbs.org/newshour/bb/business/jan-june10/makingsense_06-21.html) on June 21.]

I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace. Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place. Monetary policy remains very accommodative, and financial conditions have become more supportive of growth, in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there.
[We’ve been doing all we can and we have to believe it’s going to work.]

Banks are improving their balance sheets and appear more willing to lend.
[Unless, of course, more loans go bad. And, as I pointed out a few moments ago, they’re actually *not lending.]*

The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households’ incomes and confidence.
[I’ll leave it at that, since we don’t know *how to create more jobs.]*

At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low. Of course, the Federal Reserve will monitor price developments closely.
[In other words, I have no better idea than you do of what’s going to happen next: inflation or deflation. The safe answer: tomorrow’s weather is more likely than not to be much like today’s.]

Federal Reserve Policy

Futures markets quotes suggest that investors are not anticipating significant policy tightening by the Federal Reserve for quite some time. Market expectations for continued accommodative policy have in turn helped reduce interest rates on a range of short- and medium-term financial instruments to quite low levels, indeed not far above the zero lower bound on nominal interest rates in many cases.
[Even though critics like Stanford’s John Taylor warn that it is precisely these unnaturally low rates that caused the housing bubble of the aughts.]

We decided to reinvest in Treasury securities rather than agency securities because the Federal Reserve already owns a very large share of available agency securities, suggesting that reinvestment in Treasury securities might be more effective in reducing longer-term interest rates and improving financial conditions with less chance of adverse effects on market functioning.
[I mean, how much of Fannie Mae and Freddie Mac — the “agencies” in question — do we want to buy with newly created money?]

The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do.
[[Hakuna matata](http://en.wikipedia.org/wiki/Hakuna_matata).]

Policy Options for Further Easing

One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions.
[In a cleaned-up version of the familiar exclamation: No kidding, Sherlock. That is, we’re in unfamiliar territory and, despite the description of our policy as “fine tuning,” hitting the “seek” button on the car radio is perhaps more accurate.]

Another concern associated with additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations.
[Let’s face it, *this has been our main fear since Paul Volcker squashed inflation ca. 1980: that inflation would return.]*

A step the Committee could consider, if conditions called for it, would be to modify the language in the statement to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets.
[This means we announce we’re going to create even more money than the investing public is betting on.]

A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the IOER rate, the “interest on excess reserves” rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero. On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers.
[This is an issue few beyond the borders of Jackson Hole understand. Just to remind myself, we pay banks .25 percent in interest to *re-deposit, with us at the Fed, most of the $2 trillion we’ve created in response to the crisis. The reason: to keep the money from circulating, and thus causing a surge in inflation. Critics contend that we’ve done too good a job of it. If we lowered or eliminated the interest payment, they say, the banks would have to lend the money.]*

The FOMC will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.
[This is my main message. We’ll create more money if we have to, by buying up securities, mainly U.S. Treasuries — bonds, notes and bills — and paying for them with new ‘Federal Reserves’ electronically credited to the banks’ accounts.]

Regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery. Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.
[Just trying to end on a reassuring note. If I said anything other than this, global investors would freak. And right now, looking at the U.S. stock market, investors are doing anything but freaking: the Dow is up 130-something. I’m doing my job. Fascinating if exhausting. No wonder I attend so many Washington Nationals baseball games.]

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