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Banking

Fed Chairman Bernanke Answers Frequently Asked Questions

photo of Fed Chairman Ben BernankeThe U.S. economy is likely to grow next year at a pace sufficient to bring down unemployment, but not as quickly as most would prefer, Federal Reserve Board Chairman Ben Bernanke said in a Dec. 7 speech to the Economic Club of Washington, D.C. Meanwhile, inflation appears likely to remain low for some time, he added.

Answering questions often asked
Bernanke framed his remarks as answers to frequently asked questions:

  • Where is the economy headed?

  • What has the Federal Reserve done to support the economy and financial system?

  • Will the Fed's actions lead to higher inflation down the road?

  • And how can we avoid a similar crisis in the future?

He noted that while modest economic growth appears likely into next year, "the economy confronts some formidable headwinds." Notably, he said, tight credit and a weak job market mean household spending is unlikely to grow quickly.

The chairman described Fed actions to support the economy and financial system. The central bank began easing monetary policy in September 2007, shortly after the crisis began, Bernanke said. The target rate dropped from 5.25 percent to 0 to 0.25 percent from August 2007 to December 2008.

More recently, Bernanke said, the Fed has been instrumental in restarting the markets for asset-backed securities that finance auto loans, credit card loans, small business loans, student loans, loans to finance commercial real estate, and other types of credit.

Is inflation a valid concern
Will the Fed's actions lead to higher inflation?

In a word, no, the Fed chairman said. The Fed's balance sheet—which grew from less than $900 billion before the crisis began to about $2.2 trillion today—has already begun shrinking. Even if the balance sheet remains unusually large for some time, the Fed can tighten monetary policy to head off inflation. The biggest challenge facing the Federal Open Market Committee in preventing inflation will be judging when to begin tightening, Bernanke said.

Looking farther ahead, avoiding future financial crises will require, among other measures, including regulatory reform, better risk management by financial firms and better identification of risks by regulators. Such measures mean all regulators, including the Federal Reserve, must conduct thorough self-assessments, the chairman said.

"Working cooperatively with other agencies, we are toughening our banking regulations to help constrain excessive risk-taking and enhance the ability of banks to withstand financial stress," Bernanke said.

 

December 21, 2009

 

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