Image: Ben Bernanke
JASON REED  /  Reuters
Fed chief Ben Bernanke faces the press at a historic news conference following a meeting of the central bank's rate-setting committee. Bernanke read an opening statement and answered questions for nearly an hour.
By John W. Schoen Senior producer
msnbc.com
updated 4/27/2011 6:44:30 PM ET 2011-04-27T22:44:30

Maybe we are expecting too much from the all-powerful Fed, but Chairman Ben Bernanke acknowledged Wednesday, in his first regularly scheduled news conference, that there are limits to the central bank’s powers.

The Federal Reserve’s history-making press conference was billed as a chance to provide the public with a clearer picture to some puzzling questions:

  • What lies ahead for job growth?
  • Can inflation be tamed?
  • What will the central bank do to get the U.S. economy back on track?

Bernanke’s answer: “We’ll all just have to wait and see.”

With the Fed’s massive bond-buying program ending soon, unemployment stubbornly high, the Middle East in turmoil, gas prices surging and worries growling about rising US debt, investors, business leaders and consumers are coping with unusually high levels of uncertainty.

Story: Bernanke sees economic growth through 2013

“Business doesn’t like uncertainty," said Gordon Bethune, former CEO of Continental Airlines, before the hourlong press conference. "Tell us what going to happen and we can prepare for it.”

The highly anticipated event may have put the Fed’s crystal ball on public display. But it confirmed what Fed insiders have known for decades: Central bankers have no magic when it comes to sorting through economic uncertainty. Bernanke fully acknowledged that the policy-setting Federal Open Market Committee doesn’t have all the answers.

“I think I can say without too much fear of giving away the secret that FOMC participants do see quite a bit of uncertainty in the world going forward, and a lot of that uncertainty is coming from global factors," Bernanke said.

The list of uncertainties starts with the ongoing economic recovery — which is showing signs of flagging. The initial reading of first-quarter gross domestic product, due Thursday, is expected to show a sharp slowdown from the 3.1 percent pace in the fourth quarter of 2010. Private economists have cited factors that include a surge in oil prices and jitters about Japan and the Mideast — developments Bernanke acknowledged were hurting growth but dismissed as “transitory."

And while stressing that the central bank was hopeful growth would get back on a faster track, Bernanke acknowledged that it remains to be seen whether the Fed’s massive bond buying spree — set to end in June — will keep the economic recovery on track

”We'll be looking very carefully first to see if that recovery is, indeed, sustainable, as we believe it is,” he said.

Major Market Indices

To kick off the news conference, Bernanke reviewed the central bank's latest official forecast, showing slightly slower growth and slightly higher inflation than previously projected.

That updated forecast shows the economy growing at 3.1 to 3.3 percent this year — down from a range that previously had topped out at 3.9 percent.

The Fed now sees unemployment dropping to 8.4 to 8.7 percent by the end of the year, compared with the current 8.8 percent and 9.8 percent as recently as November.

Going into the news conference, investors were keenly interested in any hints from Bernanke on the timing of any change the Fed’s most powerful policy tool — setting the level of short-term interest rates. So far, the official Fed pronouncements — repeated again Wednesday — have offered only vague pledges to keep rates low “for an extended period.”

When pressed for a more specific timetable, Bernanke said, essentially, the Fed will continue to maintain its traditional wait-and-see approach.

“I don't know exactly how long it will be before tightening process begins, he said. “It’s going to depend, obviously, on the outlook.”

And he explained why the central bankers were reluctant to offer more certainty on the timing of any rate hike.

“The reason we use vaguer terminology is we don't know with certainty how quickly a response will be required and, therefore, we'll do our best to communicate changes in our view as -- but that will depend entirely on how the economy evolves.”

Financial markets have been rocked recently by a downgrade in the outlook for Treasury debt based on the increasingly contentious congressional debate over how to cut the federal budget deficit. But Bernanke offered little guidance on the possible impact of a debt downgrade if a budget deal isn’t hammered out soon.

“We’re still a long way from a solution, obviously, but it is, I think, of the highest importance that our political leaders address this very difficult problem as quickly and as effectively as they can,” he said.

Responding to a question about the recent surge in gasoline prices, Bernanke acknowledged that the increase has hits American pocketbooks hard. He said he expects gas price increases will slow — and used the question as a reminder of the limits of the Fed’s powers

“There’s not much the Federal Reserve can do about gas prices,” he said. “After all, the Fed can't create more oil.”

Higher prices for food and other commodities have also hit consumers and business leaders, some of whom are seeing profits squeezed by higher raw material costs.

For now, Bernanke says the central bank thinks inflation is under control. But if it isn’t the Fed is ready to raise interest rates to try to tame it.

“Ultimately, if inflation persists or if inflation expectations begin to move, then there’s no substitute for action,” her said. "We would have to respond.”

If the Fed’s first press conference fell short on detail, it drew generally high market from investors. By sticking to the Fed’s generally upbeat outlook, and avoiding any surprises, the financial markets seemed to give Bernanke something of a vote of confidence. Stocks finished the day sharply higher , with major market indices at their highest level since May 2008.

“He said the economy’s OK. Give it some time. Be patient,” said Robert Doll Jr. chief investment officer at BlackRock Advisors.” He’s trying to say our policy is working: just give it a chance.”

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Video: Bernanke: 'We are in a moderate recovery'

Vote: How did Bernanke do in his inaugural Fed press conference?

Explainer: What is the the FOMC?

  • Image: Fed Chair Ben Bernanke
    Getty Images

    The Federal Reserve's chief policymaking group has vast power over the finances of ordinary people, businesses and investors. The consequences of its interest-rate decisions range wide: from people's ability to get affordable loans to the price of cereal at the grocery store or gasoline at the corner station.

    Here's a look at the policymaking group, called the Federal Open Market Committee.

  • What is the FOMC's primary role?

    Image: Employment Development Department office in San Jose, Calif.
    AP

    Its mission is to keep the economy, inflation and employment on a healthy track. When the economy weakens, Fed policymakers cut rates or keep them low. The idea is to cause people and businesses to borrow and spend more, which sustains the economy. But when the economy grows so fast that inflation becomes a threat, Fed policymakers will raise rates or keep them high. That makes it costlier for people to borrow. Spending and other economic activity will slow. Companies find it harder to raise prices. Inflation pressures ease.

  • How does the FOMC move interest rates?

    Image: TV shows rates unchanged
    AP

    Its policymakers decide whether to buy securities. Doing so expands the flow of money into the financial system and lowers the Fed's key interest rate. Conversely, the policymakers could decide to sell securities. That would drain money from the system and tighten credit by raising rates. The Federal Reserve Bank of New York is responsible for conducting these operations.

  • Who's on the committee?

    Image: Federal Reserve Board Governor Raskin
    Reuters

    It's composed of:

    • The Fed's Board of Governors in Washington, which now totals five members but at full strength has seven members.
    • The president of the Federal Reserve Bank of New York.
    • Four of the remaining 11 presidents of the Fed's regional banks. They serve one-year terms on a rotating basis.

    Here is Tuesday's roster of voting members: Fed Chairman Ben Bernanke, Vice Chairwoman Janet Yellen, and Fed Governors Elizabeth Duke, Daniel Tarullo and Sarah Bloom Raskin (pictured), all based in Washington; William Dudley, president of the Federal Reserve Bank of New York; Charles Evans, president of the Federal Reserve Bank of Chicago; Charles Plosser, president of the Federal Reserve Bank of Philadelphia; Richard Fisher, president of the Federal Reserve Bank of Dallas; and Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis.

    (President Barack Obama has nominated Peter Diamond to be a Fed governor, but the Senate hasn't confirmed him. Diamond, a professor at the Massachusetts Institute of Technology, shared the Nobel Prize in Economics in 2010. )

  • How often does the FOMC meet?

    Image: The Federal Reserve building
    Reuters

    It regularly meets eight times a year in person at the Fed's headquarters in Washington. During the financial crisis, the FOMC also held emergency meetings, mostly by video conference. This year, half the meetings were two-day sessions, the rest one-day. All the regularly scheduled meetings last year took two days. That was because the Fed needed time to devise unconventional programs to fight the financial crisis. Traditionally, one-day meetings are more common. Each one-day meeting runs roughly five hours. Two-day meetings run about eight hours spread over the two days.

  • Why are the FOMC's rate decisions issued around 2:15 p.m.?

    Image: Ben Bernanke on TV at NYSE
    AP

    Having a consistent time helps investors digest and react to the Fed's policy decisions. Issuing decisions when the markets are open gives Fed policymakers instant feedback from investors.

  • Why are some of the FOMC's rate decisions issued around 12:30 p.m.?

    Image: CNBC

    For the first time in the Fed's history, the chairman is conducting a series of regularly scheduled news conferences to discuss the Fed's forecast. Bernanke's first was held Wednesday. They will be held four times a year, after the Fed concludes its two-day meetings to update its economic forecasts on growth, employment and inflation. So, after those meetings, the FOMC's decisions are released earlier, around 12:30 p.m. Bernanke will then holds a news conference at 2:15 p.m. It's something that Bernanke's counterparts in Europe and Japan have done for years. The Fed is hoping the news conferences will improve its communications with Wall Street investors and the American public.

  • How are the FOMC's rate decisions approved?

    Image: Gavel
    Getty Images stock

    By a majority of the voting members, who now total nine. (At full strength, there would be 12.) That said, a close decision could spell trouble for the Fed chairman. It would suggest he can't win over policymakers to his side and could leave him weakened. Most votes are overwhelming, however, indicating that Fed chiefs are typically able to build consensus.

  • How are Fed officials selected?

    Image: President Barack Obama
    Reuters

    The president nominates the Fed chairman and his colleagues on the board of governors in Washington. They must be confirmed by the Senate. The presidents of the 12 regional Fed banks are appointed by each bank's board of directors, with approval from the Fed's board. A new law revamping financial regulation, however, bars bankers who sit on the regional boards from voting. Other local business people serving on the boards still retain their vote. This change was made to address concerns about potential conflicts of interest — having officials whose companies are overseen by the Fed in Washington picking the regional presidents.

  • How and why was the Fed created?

    Image: $100 bills
    Reuters

    Congress passed the Federal Reserve Act in 1913. The legislation was signed into law by President Woodrow Wilson on Dec. 23, 1913. The Fed began operating in 1914. It was created in response to a series of bank panics that plagued the United States during the 19th and early 20th centuries. Those panics led to bank failures and business bankruptcies that roiled the economy.

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