In a first-ever press conference Wednesday, Federal Reserve Chairman Ben Bernanke avowed himself to be bullish on America's economic future, but that the recovery would take time and that the Federal Reserve can't provide a lot more help as a bridge to that brighter future.
Along these lines, he emphasized several key topics:
• Unemployment. He said the Federal Reserve's economic forecast is that unemployment will remain above normal even in 2013.
• Stimulus. He implied that, despite the high jobless rate, the Federal Reserve is unlikely to expand its efforts to stimulate the economy.
• Gas prices. While saying the Federal Reserve is on guard against wider inflation, Mr. Bernanke said his policy team can do little directly about burdensome gasoline prices.
• QE2. Bernanke said that a controversial effort to boost the economy, called a second round of "quantitative easing" (or QE2), would come to an end as planned at mid-year. In the QE2, the Federal Reserve bought Treasury bonds and other securities in an attempt to fuel growth by lowering real long-term interest rates and boosting the price of assets like stocks. Bernanke signaled that it was unlikely the Federal Reserve would enact a QE3 policy.
The reason: The economy has improved over the past year, while inflation risks if anything appear to be rising. "The tradeoffs are getting less attractive at this point," Bernanke said. He said it was uncertain that such a policy could boost job growth further "without some additional inflation risk."
But he responded to critics who have argued that QE2 has done little good. Bernanke said that financial markets responded positively at a time when the Federal Reserve couldn't cut short-term interest rates (already at zero) any further. But he said the central bank never billed QE2 as a panacea.
This was the first of what will now be quarterly news conferences, following scheduled policy meetings. At Wednesday's meeting, the Federal Reserve's Open Market Committee made little formal change in policy. The committee said it expected interest rates to remain low for "an extended period."
The Federal Reserve's goal in broadcasting the events on its website is to increase public understanding of the central bank at a time when Americans are deeply concerned about the economy – and when the Federal Reserve is concerned about its own political standing with Congress.
The Fed's portfolio
Although the Federal Reserve will stop adding to its pool of securities through quantitative easing, a separate question on the minds of investors is when the Federal Reserve will begin reducing the size of its portfolio. Bernanke simply said that would depend on how conditions in the economy evolve.
"The combination of high unemployment, high gas prices, and high foreclosure rates [is] very tough" Bernanke acknowledged near the close of the hour-long session.
"I do think that the pace [of economic growth] will pick up over time," he added, saying he was "very confident" the US hasn't lost its economic strengths.
As he spoke, the exchange value of the already-sagging dollar fell. Stock prices rose, although this amounted to staying roughly flat if you adjust for the dollar's dip. Gold, a commodity viewed by investors as a hedge against inflation, rose. US Treasury bonds held roughly steady in price.
But the price that's most visible to most Americans right now is at the gas pump.
Bernanke reiterated his long-espoused view on that subject. Global fuel prices are rising largely because of changes in demand (from nations like China) and in potential supply (from unrest in oil-producing regions). These factors are outside the Federal Reserve's control.
What the central bank can do, he said, is try to ensure that jumps in those prices don't feed a broader cycle of rising inflation in wages and prices. He pledged vigilance on that front, citing a Federal Reserve target of inflation in the range of 1.7 to 2 percent a year. Some investors say financial markets are now anticipating inflation will outpace the Federal Reserve's target by about a full percentage point.
High gasoline prices are a "double-whammy," Bernanke said, because they can affect both consumer-price inflation and economic growth. If people have to spend more at the pump, they have less to spend on other things. Bernanke said the Federal Reserve's policy committee expects energy prices to flatten out or begin falling.