In an
October 14, 2012 address in Tokyo, Fed Chairman Ben Bernanke outlined the Fed's near term economic outlook, and discussed in an international context the basic rationale underlying the Federal Reserve's recent policy decisions. According to Bernanke, the outlook is for the economic recovery to proceed at a moderate pace in coming quarters, with the unemployment rate declining only gradually and inflation running less than 2%. These expectations, however, are colored with significant downside risks including the potential for intensified strains on the economies of EU members, potentially further slowing growth. The Federal Open Market Committee (FOMC) expects to continue to employ some creative monetary policy to promote some easing in financial conditions, instill greater public confidence, and promote more rapid economic growth and faster job gains over coming quarters. Bernanke stressed, however, that monetary policy is not a cure-all. Unconventional monetary policies have risks, and the Fed has approached novel applications of monetary policies with great caution, weighing both domestic and international effects in the long term.
The FOMC sees it as important to keep exceptionally low levels of the federal funds rate at least through late 2014, and has continued through December 31, 2012 the maturity extension program (MEP) under which the Fed purchases long-term Treasury securities and sells short teem ones to help keep down long-term yields. This extension will be coupled with additional purchases of agency mortgage-backed securities (MBS) at a pace of $40 billion per month, on top of the $45 billion in monthly purchases of long-term Treasury securities planned for the remainder of this year under the MEP. Bernanke and the FOMC hope that these purchases will will provide the Committee with flexibility in responding to economic developments and instill greater public confidence that the Federal Reserve will take the actions necessary to foster a stronger economic recovery in a context of price stability.
Some have protested that employing monetary accommodation so extensively may have spillover effects on US trading partners, unintentionally causing disruptive capital flows to emerging markets as a result of rate differentials. While he is sympathetic to these concerns, Bernanke said he is not convinced that the connection between advanced-economy monetary policies and international capital flows is as strong as these critics assert. Also, the effects on emerging markets receiving these putative inflows are to a certain extent manageable by policymakers in those economies.
Bernanke also believes that the costs to emerging markets of monetary easing policies in the US and Europe must be weighed against their longer term benefits to these economies. Return of robust economies to the US and EU as a result of monetary accommodation would ultimate boost sagging export numbers from emerging markets.
The Fed remains confident in the effectiveness of additional monetary accommodation to achieve its dual mandate of maximum employment and price stability. Bernanke and the FOMC believe that the continued application of this monetary policy not only helps strengthen the US economic recovery, but by boosting US spending and growth, it has the effect of helping support the global economy as well. He urges critics of the Fed's ongoing monetary easing policies to look more long term, giving appropriate weight to their beneficial effects on global growth and stability.