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Fed: Drags on economy worse than thought

Federal Reserve building
Highlights
  • Bernanke said that the Fed's previous economic forecasts were overly optimistic.
  • Federal Reserve chairman defended the central bank's efforts to stimulate the economy.
  • FOMC members voted to keep the federal funds rate near zero.

Federal Reserve Chairman Ben Bernanke defended the central bank's efforts to stimulate the economy and encourage job creation while expressing sympathy for the frustration many Americans feel at the slow pace of economic recovery.

At a press conference following the regular Federal Open Market Committee meeting today, Bernanke acknowledged criticism from Republicans in Congress, GOP presidential candidates and Occupy Wall Street protesters.

"I certainly understand that many people are dissatisfied with the state of the economy. I am dissatisfied with the state of the economy," Bernanke said. "Increased inequality has been going on for at least 30 years."

The Fed intervened in 2008 to prevent the dire consequences of a financial sector collapse, not simply to shore up investment bankers' salaries as some protesters claim. "We were trying to protect the financial system to prevent a serious collapse of the financial system and the American economy," he said.

Bernanke's remarks came after the FOMC members voted to keep the federal funds rate near zero and maintain the current levels of monetary policy accommodation, while noting that more policy options remain if economic conditions worsen. Gross domestic product for 2011 should grow from 1.6 percent to 1.7 percent, according to the Fed. It puts core inflation at 1.8 percent to 1.9 percent and unemployment at 9 percent to 9.1 percent for 2011, each adjusted upward from the June forecasts.

Fed stays out of politics

In response to a question about Republican criticism that the Federal Reserve isn't doing enough to fight inflation, Bernanke stressed that the central bank is nonpartisan and tries to stay out of political discussions.

"We're going to make our decisions based on what's good for the economy; we're not going to take any politics into account," he said. "We listen to everybody's input, and the most important thing is that we are free to make decisions based on the interests of the American people and the economy."

Bernanke noted that inflation has remained at a steady, reasonable 2 percent. "Criticisms based on inflation have not proved to be very valid," he said.

It's too soon to gauge the full impact on interest rates for certificates of deposit and investment-grade bonds from the Federal Reserve's new program known as Operation Twist. In it, the Fed is selling $400 billion in short-term debt and purchasing the same amount in longer-term Treasuries, Bernanke said in response to a Bankrate.com question.

"It does seem to be having the intended effect of lowering longer-term interest rates and twisting the yield curve," he said. "We are quite aware that very low interest rates do have costs for a lot of people. ... We are aware of those concerns, and we take them very seriously."

However, in the long run, everyone will be better off with an economy that is growing strongly and providing full employment.

"There is a greater good here, which is the health and recovery of the U.S. economy," he said. "Savers are not going to get very good returns in an economy that is in a deep recession. Ultimately, if you want to earn money on your investments, you have to invest in an economy that is growing."

Fed monitoring MF Global

The Fed is monitoring the impact of the collapse of MF Global, a primary dealer in Treasury securities, to ensure there are no widespread effects, Bernanke said.

However, the Fed is not the primary regulator of MF Global, whose operations are overseen on an ongoing basis by the Securities and Exchange Commission and the Commodity Futures Trading Commission, he said.

Bernanke acknowledged that the Fed's previous economic forecasts were overly optimistic about how quickly the economy would recover and unemployment would abate. "Evidently the forces of drag on the recovery were stronger than we thought," he said, citing the volatility of the European debt crisis as another factor weighing down the U.S. economy.

The Fed will continue to monitor economic conditions and stands ready to increase its purchases of mortgage-backed securities or take other steps to address new signs of weakness. In the long run, the central bank would like to return its portfolio to 100 percent Treasury securities.

"We are being very aggressive in providing monetary accommodation," he said. "We will continue to observe how the economy evolves. We are prepared to take further action."

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