The Federal Open Market Committee met to set the federal funds rate, a key interest rate. Here are 10 takeaways about what Chairman Ben Bernanke said Wednesday at the Fed’s press conference.
1. Low rates don’t discourage lending.
Bernanke said because the Fed’s monetary policy actually lowers the amount that banks can make by buying foolproof investments such as Treasuries, it pushes banks to look elsewhere for places to put their cash.
“Low rates should make it even more attractive to banks to look for borrowers and to earn the spread between the safer rate and what they can earn lending to households and businesses,” he said.
2. Europe is already a drag on the US economy, and it’s getting worse.
“Europe has had additional problems, and we’ve seen some of those effects in financial markets,” he said.
But while reiterating some of the steps they had taken to help European banking authorities, including giving them the ability to freely swap euros for American dollars should the need arise, Bernanke stressed that European banks had to take the lead in resolving the crisis.
“We are hopeful that Europe will take additional steps,” he said. “But we are prepared in case things get worse to protect the U.S. economy and the U.S. financial system.”
3. The fiscal cliff, coming Jan. 1, is real and is already affecting markets.
The so-called fiscal cliff is a massive decrease in government spending brought on by the government’s automatic spending cuts, coupled with a massive tax increase from the automatic January 2013 expiration of the tax cuts passed during the Bush administration and renewed in 2010.
Bernanke said that if Congress fails to act and the combination of tax increases and spending cuts goes into effect, it could have a big impact on the U.S. economy. In fact, the prospect already is casting a shadow on government contractors, who aren’t sure whether some contracts will be renewed and are making employment decisions based on that.
“As we move forward in the year, we do anticipate that the uncertainty with the so-called fiscal cliff will have economic effects,” he said. “Financial markets don’t like uncertainty, particularly uncertainty of this magnitude, and that will be a negative.”
Bernanke encouraged Congress to resolve the issue before the fiscal drop-off, and encouraged lawmakers to do more to fix the economy. “We welcome help and support from any other part of the government,” he said.
4. Housing is still hurting, not helping.
“Housing often plays a very important role in economic recovery through both construction and related industries, but also because higher house prices increase consumer wealth and promote consumer spending,” he said.
The problem is, while the housing market is getting better, it’s still improving not fast enough, and that’s contributed to the sluggishness of the economic recovery, he said.
“We’re not getting the size of the boost that we would normally be getting,” Bernanke said.
5. Extending Operation Twist is a major step and shouldn’t be discounted.
“The maturity extension program is a substantive step, and additional asset purchases will be considered if we need to take additional measures to strengthen the economy,” Bernanke said in the press conference.
Then, he repeated himself later in the briefing. “Again we did take a substantive step by extending (the) maturity program. We’re prepared to do more. We need more information about where the economy is going and what is happening in Europe,” Bernanke said.
6. Asset purchase programs are not without cost or risk and can’t be started willy-nilly.
“Each program has costs and risks, with respect to market forces and (the) exit process, and should not be launched lightly,” Bernanke said. “In terms of the costs, I would list briefly: large asset purchases increase (the) size of (the) balance sheet and make exiting an extended process.”
As well, if the Fed holds overly large shares of one type of security, “it may affect market functioning,” he said.
But there is more that the Fed can do — and they will do it.”We do have considerable scope to do more and will stand by to do more, and looking primarily at the labor market in this respect. If we’re not seeing sustained improvement, it will require further actions,” Bernanke said. “Maturity extension. We have taken that as far as we can. So (we) would have to take other steps to add stimulus to the economy.”
7. The Volcker rule could have helped prevent JPMorgan’s $2 billion ‘London Whale’ loss.
“Compensation would not incentivize managers to take proprietary positions,” Bernanke said. “The control and governance aspects of it might have potentially changed the outcome.”
8. Actions by the Federal Reserve have helped everyone, even the people who don’t qualify for credit, though the benefits are indirect.
“Access to credit is a major issue. Mortgage access is much tighter than it has been, and credit card access is more restricted than it has been in the past, which mutes the effectiveness of the Fed’s actions.
“But many Americans are able to take advantage of lower interest rates … There has been an impact through lower interest rates, but more broadly, there are indirect effects. If a firm has a low cost of capital, (it) can borrow, expand to add products and (is) more likely to hire. The extent to which payrolls have increased in the last few years is disappointing. There has been hiring and some comes from Federal Reserve policy on spending and investment. It promotes hiring and demand for products that people are producing,” Bernanke said.
9. Economic data are currently as clear as mud, but employment is definitely bad.
“Incoming data were somewhat disappointing, but it is not entirely clear how to read them. Europe has additional problems, and there is some case to be made for making additional judgments about where the economy is going,” Bernanke said.
“Unemployment is still too high, but it is going down — too slowly, but it is going down. Our sense is that people are finding jobs but not at the rate we would like to see. If we don’t see continued improvement, we will be prepared to take additional steps,” he said.
10. It’s true, Fed policies have purposely pushed investors into riskier asset classes.
“Interest rates are quite low and are being pushed down by safe-haven flows and other factors, but we can lower interest rates more. Operation Twist and other asset purchases work through other channels. In particular, by acquiring securities in the market and bringing them onto the Fed balance sheet, we essentially induce investors to move into substantive securities,” Bernanke said.
“For example, an investor who sells a security to the Fed may end up buying a corporate bond instead, and the effect will be to lower corporate bond rates and corporate spreads. Or, a bank having sold a Treasury security may decide to make a loan. It’s not just the effect on long-term interest rates, but it feeds through other interest rates and other spreads,” he said.