The following transcript has not been checked for accuracy.
it's one of the reasons the federal reserve has been so for the first quarter. maybe something a little under 2%. most of the factors that account for the slower growth in the first quarter appear to us to be transitory. they include things like, for example, lower defense spending than was anticipated, which will presumably be made up in the later quarter. weaker exports. given the growth in the global economy, we expect to see that pick up again. and other factors like weather and so on. now, there are some factors there that may have a longer term implication. for example, construction, both residential and nonresidential, was very weak in the first quarter. that may have some implications going forward. so, i would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory. that being said, we've taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy. reporter: mr. chairman, given what you know about the pace of the economy now, what is your best guess for how soon the fed needs to begin to withdrawal extraordinary stimulus for the economy? could you also say what is your working definition of what extended period means from the purposes of the fed's statement. well currently, as the statement suggests, we are in a moderate recovery. we'll be looking very carefully first to see if that recovery is, indeed, sustainable, as we believe it is. and we'll also be looking very closely at the labor market. we've seen improvement in the labor market in the first quarter relative to the latter part of last year. but we'd like to see continued improvement, more job creation going forward. at the same time, we're also looking very carefully at inflation, the other part of our mandate, as i've 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 normalwatching that care watching inflation expectations, which, you know, which are important that they remain well anchored if we're going to see inflation remain under good control. so, to answer your question, i don't know exactly how long it will be before tightening process begins. it's going to depend, obviously, on the outlook and on those criteria which i suggested. the extended period language is conditioned on exactly those same points, extended period is conditioned on resource slack on subdued inflation and on staple inflation expectations. once those conditions are from those conditions, that will be the time we need to begin to tighten. extended period suggests there would be a couple meetings, perhaps, before action, but unfortunately, the reason we use vaguer terminology is we don't know with certainty how quickly response will be required and, therefore, we'll do our best to communicate changes in our view as -- but that will depend entirely on how the economy evolves. reporter: mr. chairman, first, thanks for doing this. this is a tremendous development. there are critics who say fed policy has driven down the value of the dollar. and a lower value to the dollar reduces american standard of living. how do you respond to the criticism that essentially fed policy has reduced american standard of living? thanks, steve. first, i should start by saying that secretary of the treasury, of course, is the spokesperson for u.s. policy on the dollar. secretary geithner had some words yesterday. let me just add to what he said, first by saying that the federal reserve believes that a strong and stable dollar is both in american interests and in the interest of the global economy. there are many mack fors that cause the dollar to move up and down over short periods of time. over the medium term, where our policy is aimed, we're doing two things. first, we are trying to maintain low and stable inflation by our definition of price stability. by maintaining the purchasing value of the dollar, keeping inflation low, that's obviously good for the dollar. the second thing we're trying to accomplish is to get a stronger recovery and to achieve maximum employment. again, a strong economy growing with attracting foreign capital is going to be dogood for the dollar. in our view, if we do what's needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term. reporter: mr. chairman one can't help but notice it's been unsesful so far. the dollar fluctuates. one factor, for example, that has caused fluctuation has been the safe haven effect. for example, during the height of the crisis in the fall of 2008, money flowed in to the treasury market and drove up the value of the dollar quite substantially, reflecting the fact that u.s. capital markets, the deepest and most liquid in the world, and a lot of what you've seen over the last couple years is just the unwinding of that as the economy has strengthened and as uncertainty has been reduced. that's indicative, i think, of the high standing the dollar still remains in the world. again ultimately, the best thing we can do to create strong fundamentals for the dollar in the medium term is to first keep inflation low, which maintains the buying power of the dollar. second, to create a strong economy. reporter: mr. chairman, many americans are upset that gasoline prices are rising so fast and that food prices are also going up. can you talk about whether there's anything that the fed can or should do about that? and can you also comment -- elaborate on the increase we've seen in the inflation forecast that the fed put out today. sure. thanks, john. first of all, gasoline prices, obviously, have risen quite significantly. and we, of course, are watching that carefully. higher gas prices are absolutely creating a great deal of financial hardship for a lot of people. and gas, of course, is a necessity. people need to drive to get to work. so, it's obviously a very bad development to see gas prices rise so much. higher gas prices, higher oil prices also make economic developments less favorable. on the one hand, obviously, the higher gas prices add to inflation. on the other hand, by draining purchasing power from households, higher gas prices are also bad for the recovery. they cause growth to decline as well. so, it's a double whammy coming from higher gasoline prices. now, our interpretation of the increase in gas prices is the economist's basic mantra of supply and demand. on the one hand, we have a rapidly growing global economy, emerging market economies are growing very quickly. and their demand for commodities, including oil, is very, very strong. indeed, essentially all of the increase in the demand for oil in the last couple years, the last decade, has come from emerging market economies. in the united states, our demand for oil, our imports have been actually going down over time. so the demand is coming from growing economy where we've seen about a 25% increase in emerging market output in the last -- since before the crisis. on the supply side, as everybody knows who watches television, we've seen disruptions in the middle east and north africa, libya and in other places that have constrained supply, supply has not been made up and that, in turn, has driven gas prices up quite significantly. again, this is a very adverse development. it accounts in the short run for the increase in -- pretty much almost all of the increase in our inflation forecast. at least in the very near term. there's not much the federal reserve can do about gas prices, per se. at least not without derailing growth entirely, which is certainly not the right way to go. after all, the fed can't create more oil. we don't control the growth rates of emerging market economies. what we can do is basically try to keep higher gas prices from passing into other prices and wages throughout the economy and creating a broader inflation, which would be much more difficult to extinguish. again, our view is that most likely, of course we don't know for sure, but we'll be watching carefully, our view is that gas prices will not continue to rise at recent pace. as they stabilize or even come down, if situations stabilizes in the middle east, that that will provide some relief on the inflation front. we'll have to watch it very carefully. reporter: thank you. scotlandman from bloomberg news. mr. chairman, you've stated several times this year that the recovery won't be fully established until we see a sustained period of stronger job creation. creation. established yet? if not, what's your definition of a sustained period? what's your definition of stronger job creation? well, as i mentioned, we've made a lot of progress. last august, when we began to talk about another round of securities purchases, growth was very moderate and we were actually quite concerned that growth was not sufficient to bring the unemployment rate down. since then we have seen a reasonable amount of payroll creation, job creation. that picked up in the most recent few months. together with the decline in the unemployment rate from, you know, 10% down to the current rate of 8.8%. so, labor market is improving gradually, as we say in our statement. and we just like to make sure that is sustainable and the longer it goes on, the more confident we are. again, it is encouraging to see the improvement we've seen in recent months. that being said, the pace of improvement is still quite slow. and we are digging ourselves out of a very, very deep hole. we are still something like 7 million plus jobs below where we were before the crisis. so, clearly, the fact that we're moving in the right direction, even though that's encouraging, doesn't mean the labor market is in good shape. it's -- obviously, it's not and we're going to have to continue to watch and hope that we will get stronger and increasingly strong job creation going forward. reporter: mr. chairman, you say in your statement that longer term inflation expectations have remained stable but a number of inflation has risen in recent months. it's clear from your forecast you expect headline inflation to run above core inflation for some period. is there anything the federal reserve can do to prevent the public from maybe incorrectly assuming that a period of higher inflation is on the way as a result? thank you. well, again, inflation expectations we're concerned about are medium term inflation expectations. so, we have seen, for example, in the financial markets and index bond market, for example, or in surveys like the michigan surv survey, we've seen near term inflation expect takings rise significantly, which is reasonable given higher commodity prices, higher gas prices. but for the most part, although there's been some movement here and there, for the most part, i think it's fair to say that medium-term inflation expectations have not really moved very much. they still indicate confidence that the fed will ensure that inflation in the medium term will be close to what i call the mandate consistent level. what can we do? in the short run we can communicate and try to make sure the public understands what our policy is attempting to do. to be clear what our objectives are and what steps we're willing to take to meet those objectives. ultimately, if inflation persists or if inflation expectations begin to move, then there's no substitute for action. we would have to respond. i think while it is very, very important for us to try to help the economy create jobs and to support the recovery, i think every central banker understands that keeping inflation low and stable is absolutely essential to a successful economy. we will do what's necessary to ensure that that happens. reporter: mr. chairman, what will be the impact on the economic recovery, job creation and rates on mortgages and other loans when the fed ends its $600 billion bond-buying program? a quick follow-up is, will the fed -- how long will the fed continue to allow for reinvestments? thank you. as i've noted and as you're all aware, we're going to complete the program at the end of the second quarter, $600 billion. we are going to do that pretty much without tapering. we're just going to let the purchases end. our view is that based on past experience and based on our analysis, is that the end of the program is unlikely to have significant affects on financial markets or on the economy. the reason being that, first, just a simple point that we hope that we have telegraphed today, we hope we have communicated what we're planning to do. and the markets have well anticipated this step. and you would expect that policy steps, which are well anticipated by the market, would have relatively small next because whatever effects they're going to have would have already been capitalized in the financial markets. secondly, we describe generally to what we call here the stock view of the effects of security purchases by which i mean that what matters primarily for interest rates, stock prices and so on, is not the pace of ongoing purchase but, rather, the size of the portfolio that the federal reserve holds. and so, when we complete the program, as you noted, we are going to continue to reeninvest maturing securities, treasury and nbs, so the amount of securities we hold will remain approximately constant. therefore, we shouldn't expect any major effect of that. put another way, the amount of ease -- monetary policy easing should essentially remain constant going forward from june. at some point, presumably early in our exit process, we will, i suspect, based on conversations we've been having around the fmoc table, it's very likely that an early step would be to stop reinvesting all or part of the securities, which are coming -- which are maturing. but take note that that step, although a relatively modest step, does constitute a policy tightening, because it would be lowering the size of our balance sheet and, therefore, will be expected to essentially tighten financial conditions. that being said, we, therefore, are to make that decision based on the outlook, based on our view of how sustainable the recovery is and what the condition -- the situation is with respect to inflation. we will base that decision on the evolving outlook. it depends on the outlook. the committee will have to make a judgment. reporter: is it in the fed's power to reduce the rate of unemployment more quickly? how would you do that and why are you not doing it? well, i should say, first of all, that 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. even beyond the steps we took to stabilize the system, we have created new ways to ease monetary policy. we've brought the federal funds rate target close to zero. rate target close to zero. we have used forward guidance in our language to affect expectations of policy changes. of course, as everyone knows, we have now been through two rounds of purchases or longer term securities which has been effective in easing financial conditions and, therefore, providing support for recovery and for employment. going forward, we'll have to continue to make judgments about whether additional steps are warranted. as we do so, we have to keep in mind that we do have a dual mandate, we do have to worry about both the rate of growth, but also the inflation rate. and as i was indicating earlier, i think that even purely from an a employment perspective, if inflation were to become unward, inflation expectations were to rise significantly, the cost of that in terms of employment loss in the fewer, as we had to respond to that, would be quite significant. so, we do have to make sure that we are paying adequate attention to both sides of our mandate, but clearly it's the case we have done extraordinary things in order to try to help this economy recover.
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