Federal Reserve Chairman Ben Bernanke discussed how the Federal Open Market Committee succeeded through its decision in December of its open-ended quantitative easing program, which has brought long-term interest rates down and reduced mortgage rates to a ‘credibly low’ level.
Raising interest rates would increase budget deficits, making fiscal problems more challenging. Thus, raising rates would not be a sensible decision to get Congress moving forward on budget negotiations, Bernanke stated.
The Committee decided to continue to purchase additional agency mortgage-backed securities at a pace of $40 billion per month.
“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” the report said.
Furthermore, there also hasn’t been a completely new method of monetary policy the Fed hasn’t explored and that asset purchases as well as communications policies are the two main tools at the Fed disposal.
Bernanke spoke on Monday to the University of Michigan’s Ford School of Public Policy, followed by a question-and-answer session. The public was able to ask Bernanke questions via Twitter.
One of the more popular questions asked, which was retweeted 190 is featured below. Click to view the tweet.
The first Twitter question asked, why the Fed continues to ‘undershoot’ its inflation target.
Bernanke stated that the short-term interest rate is close to zero and that the Fed has to pay lose attention to the costs and risks of the policies.
Quantitative thresholds are the better way to communicate interest rate guidance rather than providing a projected calendar date for policy shifts. The main benefit is that QE thresholds allow great clarity on policy evolution given the economic changes.
Additionally, Bernanke noted the main area of financial reform that continues to be neglected is both government-sponsored enterprises Fannie Mae and Freddie Mac.
The fiscal cliff resolution that was finalized, made progress toward long-term sustainability and also made a good start on removing components that would harm the economy.
However, “I should hasten to say we are not out of the woods,” Bernanke cautioned.
