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June 22, 2011

Bernanke Press Conference & FOMC Meeting Recap

June 22, 2011

Bernanke Press Conference & FOMC Meeting Recap

Rates down slightly today after the Federal Open Market Committee (FOMC) kept overnight bank-to-bank Fed Funds Rates and Fed-to-bank Discount Rates unchanged at .25% and .75% respectively. They’ll keep rates low for an extended period, and QE2 will end as scheduled June 30.

Below are key remarks on rates, jobs, mortgages, and home prices he made throughout his post-FOMC press conference.

On ‘extended period’ language: We say rates will remain low ‘extended period’ because we don’t know how long rates must stay low. It’ll be at least 2-3 meetings (meaning November or December), or significantly longer before we change ‘extended period’ language.

On exiting from accommodative rate policy: There’s no alternative than to watch market data and determine when exit should begin and how quickly we will tighten.

On employment growth: We expect faster growth in second half of 2011 and healthier job creation numbers. (Remember this is a rough count of jobs created, not actual bodies. How To Read Jobs Reports). We project unemployment rate to come down painfully slowly: 5.5% “full employment” range is some years away.

On “transitory” inflation: we no longer have deflation risk. Inflation is above target and we expect it to fall. Notwithstanding bad news recently, labor market performing better than last year. We don’t know how much of current slowdown is temporary vs. permanent. We’ll adjust projections as new data come in.

On future Fed rate policies: We can do new securities purchases. We can cut interest paid on excess reserves. We can give guidance on the balance sheet. We can give a fixed date to define ‘extended period’. Each of these is untested and has their own costs. We can take additional action if market conditions are warranted.

Response to his previous criticisms of Japanese central bank policy: I’m a little more sympathetic to central bankers than I was 10 years ago.

On deflation vs. inflation debate: Persistent deflation can be a debilitating factor in economy, and we acted on that here in U.S. In August-September 2010, we could infer one-third chance of deflation from TIPs prices. That’s why we did QE2, and we succeeded. I realize that’s controversial.

On mortgage rates: We succeeded in lowering mortgage rates, so those who can get credit can get low rates. Credit tightening (FICOs and other factors) have eliminated bottom-third of borrowers from loan qualifying.

On housing: Monetary policy intended to help income which would help housing.

On mortgage industry practices: Fed’s goal is to improve mortgage servicing practices, and help banks improve management of foreclosed properties.

More on housing: Fed helps other agencies that have a hand in housing. I’m head of TARP oversight board, which looks after HAMP, the government’s loan modification program.

On loan modifications: We want to modify loans where appropriate, and speed process of foreclosure in order to clear the market and allow people to operate in a market where they’re more confident in stable rather than falling prices.

On home prices: Housing being sold in a non-distressed basis have much more stable pricing. Maybe 40% of home sales are distressed, and policies are aimed at reducing that amount so pricing will be more stable.

Full June 22 FOMC Rate Policy Statement