Fed Chairman Bernanke made his semi-annual testimony to the House to update Congress on the current economy and the path of monetary policy.
The testimony started with some review of what the country has gone through. "The financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II". But noted that "the pace of [economic] decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization". In fact, the FOMC participants (i.e. those officials that direct Fed policy) expect output will increase slightly over the remainder of 2009. The "recovery is expected to be gradual in 2010 with some acceleration in activity in 2011".
The focus was on the path ahead for monetary policy. "The FOMC believes that a highly accommodative stance of monetary policy will be appropriate for an extended period." The eventual exit from the extraordinary measures taken to provide needed liquidity through massive traditional (interest rate) and non-traditional policy easing requires some early explanation as the market fears an inflationary result if the Fed waits too long before cutting them back.
An array of options is open to the Fed to reduce the current massive supply of reserves in the banking system. Draining reserves through traditional reverse repurchase agreements or outright sales of security holdings are added to by the Fed's ability to adjust the rate of interest paid on reserve balances and the resulting demand for those balances. Bernanke did not mention the ability to raise demand for reserves by boosting reserve requirements (noted in the May 11 post). More detail and alternatives are likely ahead as the testimony noted the attention the FOMC has devoted to the exit strategy.
The testimony also included a short listing of global reform needed to protect the financial system. They included mechanisms for dealing with emerging systemic risks and stronger capital and liquidity standards. Overall, a tighter system of financial supervision and regulation. See the list and the full testimony in the Monetary Policy Report. The far longer 54 page Report to Congress lays out more detail.
The table below are the Fed's revised economic projections released with the June 23-24 FOMC minutes on July 15. Included are the prior estimates made at the April FOMC meeting. 2009 estimates have been revised stronger for all four measures of growth, unemployment and inflation.
2009 2010 2011
Change in real GDP. . . . . . -1.5 to -1.0 2.1 to 3.3 3.8 to 4.6
April projection. . . . . . -2.0 to -1.3 2.0 to 3.0 3.5 to 4.8
Unemployment rate. . . . . 9.8 to 10.1 9.5 to 9.8 8.4 to 8.8
April projection. . . . . . 9.2 to 9.6 9.0 to 9.5 7.7 to 8.5
PCE inflation. . . . . . . . . . . 1.0 to 1.4 1.2 to 1.8 1.1 to 2.0
April projection. . . . . . 0.6 to 0.9 1.0 to 1.6 1.0 to 1.9
Core PCE inflation. . . . . . 1.3 to 1.6 1.0 to 1.5 0.9 to 1.7
April projection. . . . . . 1.0 to 1.5 0.7 to 1.3 0.8 to 1.6
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