Zac from the Washington Post asks whether the Federal Reserve actually has the capacity to lower the unemployment rate faster if it chose to do so? Ben says that there is some uncertainty about the direction that the recovery is going. If it appears that inflation is going to be below the target rate, then it will be time to look at some other options and tools. Ben is pretty satisfied that purchasing securities has beneficial effects on the economy. However, one would expect there to be more action in the housing sector with mortgage rates below 4%. Ben needs to study more to determine the most effective approach.
Steve from Market News International asks about the rationale for continuing to have the forward guidance language, rather than allowing these new forecasts of the fund rates speak for themselves? Ben says that his two main tools right now are asset purchases and communication. That is part of the reason for bringing out these ideas at this time. Ultimately, future decisions are made by the committee in a meeting. So this will always trump these interest rate expectations.
Hugh asks about the slowing global growth and why the Federal Reserve is reluctant to extend a loan to the International Monetary Fund. Ben says that lending money to financial institutions is part of his mandate, but not to the International Monetary Fund. That would be under the purview of the Treasury Secretary and Congress.
Scott from CNN asks about the inflation rate and the PCE, and he also asks about why the Fed has always been so vague about the inflation rate. Ben Bernanke says he chose the PCE index for many reasons. It is more flexible and relevant to the American public. It also incorporates more of the healthcare sector. So the PCE is a better measure of the inflation faced by consumers than the CPI. But these indexes move very close together anyways. The argument that the value of your dollar declines by 2% per year isn’t a very good one unless you stash your money away in your mattress. If you give it to one of our financial institutions, then you will be compensated.
Peter from Bloomberg Television asks about the payroll tax cut and the impact that this could have on the US economy. Ben Bernanke says that he has tried to convey to congress that they should try to maintain fiscal responsibility. This means they should simplify the tax code and reduce spending so that the people will know that the system will be stable for at least the next 30 years. We also need to be sensitive to the fragile recovery that we are still experiencing.
