Bernanke: Fed Committed to Supporting Recovery

Second is easing financial conditions by modifying the FOMC’s communication. The FOMC’s post-meeting statement, he said, “currently reflects the FOMC’s anticipation that exceptionally low rates will be warranted ‘for an extended period,’ contingent on economic conditions.” A step the Committee could consider, he continued, “if conditions called for it, would be to modify the language in the statement to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets.”

The third option would be to reduce the interest paid on excess reserves. The interest on excess reserves rate (IOER), which is the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System, “currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero” to encourage banks to lend, Bernanke said.

The fourth strategy, he said, proposed by several economists, is that the FOMC increase its inflation goals. Under this strategy the FOMC would increase its medium-term inflation goals above levels consistent with price stability, Bernanke explained. However, he said, “I see no support for this option on the FOMC. Conceivably, such a step might make sense in a situation in which a prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations.”

Such a strategy, he continued, “is inappropriate for the United States in current circumstances. Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability.”