Yesterday Federal Reserve Chairman Ben Bernanke gave his semiannual monetary policy report to the Congress before the Senate’s Committee on Banking, Housing, and Urban Affairs, in Washington, D.C. During the speech he acknowledged that the current high level of unemployment will like persist for some time and that inflation will likley remain below the Fed’s typical target range of 1.5% to 2.0%.
“Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010, and roughly 3-1/2 to 4-1/2 percent in 2011 and 2012. The unemployment rate is expected to decline to between 7 and 7-1/2 percent by the end of 2012. Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw the risks to growth as weighted to the downside. Most participants projected that inflation will average only about 1 percent in 2010 and that it will remain low during 2011 and 2012, with the risks to the inflation outlook roughly balanced. “
Regarding monetary policy Bernanke addressed the extraordinary measures that the Federal Reserve undertook beginning in early 2008.
“Compared with the period just before the financial crisis, the System’s portfolio of domestic securities has increased from about $800 billion to $2 trillion and has shifted from consisting of 100 percent Treasury securities to having almost two-thirds of its investments in agency-related securities. In addition, the average maturity of the Treasury portfolio nearly doubled, from three and one-half years to almost seven years. The FOMC plans to return the System’s portfolio to a more normal size and composition over the longer term, and the Committee has been discussing alternative approaches to accomplish that objective.”
In his concluding remarks Bernanke implied that the Federal Reserve is prepared to take further action in the future if the threat of deflation and economic contraction persisted.
“Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”