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Ben Bernanke defends Fed actions and downplays concerns about inflation at first news conference [Updated]

April 27, 2011 | 12:37 pm

Bernanke news conference
At a historic news conference Wednesday, Federal Reserve Chairman Ben S. Bernanke defended the central bank's unprecedented and controversial actions to stabilize and revive the economy and tried to deflect concerns that inflation could derail the recovery.

But Bernanke admitted during the hourlong session that inflation has been rising and promised that the Fed would watch it closely even as he acknowledged that average Americans were impatient with the slow recovery.

"I think every central banker understands that keeping inflation low and stable is absolutely essential to a successful economy and we will do what's necessary to ensure that happens" Bernanke said, sitting at a desk in a Fed auditorium flanked by American and Federal Reserve flags.

While saying long-term inflation projections remained stable, he said short-term price hikes, largely fueled by increased oil prices, have convinced the Fed not to continue its latest stimulus effort beyond its scheduled end in June.

"The trade-offs are getting less attractive at this point," he said. "Inflation has gotten higher … it's not clear we can get substantial improvements in payrolls without some additional inflation risk."

It was the first time a Fed chairman held a news conference after a meeting of the central bank's policymaking committee. At that meeting, Fed officials said they planned to stay the course of trying to boost the economy with monetary stimulus and near-zero interest rates despite concerns about rising inflation.

Because of the Fed's unprecedented intervention in the economy during the financial crisis, lawmakers and the public have increasingly focused on its secretive practices. The Fed has been forced by Congress and media lawsuits to release for the first-time detailed information about who receives its money.

Wednesday's news conference was a voluntary step by the Fed to become more transparent. The business media treated it like a royal wedding. Makeshift TV sets were erected outside the Fed's white marble headquarters in Washington, CNBC ran a countdown clock throughout the day ticking off the minutes to the event, and analysts speculated about what Bernanke would say and how it would affect financial markets.

[Updated at 12:53 p.m.: “I think he knocked the ball out of the park,” Diane Swonk, chief economist at Mesirow Financial, said after the news conference. “He was well-prepared and did exactly what he wanted to do -– do no harm."

Bernanke amplified the Fed’s projections without causing major movement in the financial markets, and did a good job of explaining the difference between short-term and longer-term inflation, she said.

“Although he didn’t make any news, he did clarify a lot,” Swonk said. “He’s a teacher and that shows. He’s very good at explaining things without being too esoteric."] 

Bernanke was cautious in his answers. He began with a 10 minutes of remarks summarizing the policy statement issued earlier Wednesday by the Federal Open Market Committee. When reporters tried to pin him down on the ambiguous language used by the Fed, he gave little ground. Asked to explain exactly how long the Fed's "extended period" of near-zero interest rates would last, he said the term suggested it would be at least through a couple of policymaking meetings.

"Unfortunately, the reason we use this vaguer terminology is we don’t know with certainty how quickly response will be required," he said.

Bernanke was pressed on the effects of rising fuel prices and higher inflation and why the Fed was not doing more to contain them. But he flashed one bit of softspoken frustration as he said the central bank was trying to balance its dual mandate of keeping inflation and unemployment low.

"There’s not much the Federal Reserve can do about gas prices, per se, at least not without derailing growth entirely, which certainly is not the right way to go," he said. "After all, the Fed can’t create more oil."

Since replacing Alan Greenspan as Fed chairman in 2006, Bernanke has moved steadily toward communicating more widely and regularly with the public, in part to stem broad criticisms about the Fed’s role in bailing out large financial institutions whose excesses contributed to the deep 2007-09 recession. Since 2009, the professorial Fed chief has made two appearances on CBS’ “60 Minutes,” held a televised town hall-style meeting in the Midwest and taken questions from journalists in other settings. 

Bernanke’s more free-wheeling exchange with the media Wednesday was the first of regular news conferences to be held quarterly by the Fed chairman -– something that once was unthinkable for the institution. Until 1994 the Fed didn’t even issue statements about its policy decisions, preferring instead to let the public largely guess what happened with short-term interest rates.

“There has been a 180-degree change in thinking,” said Lyle Gramley, a Fed governor from 1980 to 1985 under Chairman Paul Volcker. “When I was there, the idea was to try to surprise markets with what you’re doing. That was supposed to make monetary policy more effective.”

In recent years Fed officials have determined that more communication, not less, is a better path to meeting the central bank’s objectives, particularly with market movers on Wall Street. Also, the latest recession has propelled angry efforts by lawmakers to seek greater transparency from the Fed and to make the institution more accountable. 

Analysts also point out that central bankers in Europe, Japan and Canada routinely hold sessions with reporters after issuing policy decisions. “The Fed is a laggard,” said Allan Meltzer, a Fed historian at Carnegie Mellon University.

Bernanke said he has been trying to make the Fed more transparent.

"It used to be the mystique of central banking was all about not letting anybody know what you were doing," he said. "I personally have always been a very big believer in providing as much information as you can to help the public understand what you are doing, help the markets understand what you're doing and be accountable to the public for what you’re doing."

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-- Don Lee and Jim Puzzanghera

Photo: Federal Reserve Chairman Ben S. Bernanke answering reporters questions at a news conference Wednesday. Credit: Getty Images

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