IE 11 is not supported. For an optimal experience visit our site on another browser.

Bernanke to reporters: Fed has limits

Image: U.S. Federal Reserve chief Ben Bernanke takes his seat at the beginning of a news conference in Washington
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. JASON REED / Reuters

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.

“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.

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.”