Fed holds the line, makes news with news conference

WASHINGTON — In his first full-blown news conference, hours after holding benchmark lending rates steady, Federal Reserve Chairman Ben Bernanke on Wednesday ratcheted down his 2011 growth projections and confirmed that he'd soon end a controversial program to buy government bonds.

The Federal Open Market Committee left the federal funds rate at a range between zero and 0.25 percent, where it's been since the U.S. financial crisis started almost three years ago. The Fed's statement also confirmed that the program to purchase up to $600 billion in government bonds to support a shaky economy ends in June.

The real novelty Wednesday, however, was the first of what the Fed said would be four annual news conferences after monetary policy meetings.

Looking professorial in a gray suit and red tie, the bearded Bernanke first read a brief statement that updated the Fed's January economic forecast. He said he and colleagues now expected the economy to grow this year from 3.1 percent to 3.3 percent. That's slower than the 3.4 percent to 3.9 percent range the Fed had forecast in January.

Similarly, the Fed's read of inflation had worsened because of higher oil and gasoline prices, he said. So-called "headline inflation," which includes food and fuel prices, now is projected in a range of 2.1 percent to 2.8 percent this year, up considerably from the 1.3 percent to 1.7 percent range projected in January. The Fed chief expected the rise in energy prices and their effect on the economy to be transitory.

As the cameras snapped furiously, Bernanke then did what no predecessor before him had done in modern times: He fielded questions from the news media.

In the William McChesney Martin Jr. Building, where monetary policy meetings are held, he calmly took mostly softball questions for more than half an hour from reporters selected and assigned seats by his press office. The event was far more controlled than similar news conferences by treasury secretaries, arguably his closest peer in government in terms of moving financial markets.

Most of the questions and answers already had been touched on in March testimony before Congress. Bernanke repeated that it's imperative for Congress and the president to get debts and deficits under control. He restated that Fed would guard vigilantly against inflation and that rising oil prices are a drag on the economy. He reminded that while the Fed would halt its purchase of bonds as scheduled, it'd review economic conditions when determining whether similar efforts are needed in the future.

The chairman did add clarity about the Fed's horizon for ending the unusually long period of low interest rates to spark the economy. The Fed has said it expects "accommodative" policies to continue for an "extended period of time." Asked to define that period, Bernanke said at least a "couple of meetings" of the Fed's monetary policy group. That suggests the earliest there could be a climb in the federal funds rate_ which influences a wide range of lending rates in the economy — would be late June.

Bernanke strongly defended the purchase of government bonds to stimulate the economy, saying those who don't think it worked perhaps expected too much.

"We were very clear (that) this was not going to be a panacea but that it was going to turn the economy in the right direction," the Fed chief said.

By purchasing huge amounts of longer-term government bonds, the Fed drove down their rate of return to investors, making them less attractive. The idea was to force more risk taking in the economy, and it's thought to have given a sharp push to everything from oil and silver prices to stock prices.

The end of the purchases in June won't be felt abruptly in financial markets, Bernanke explained, because the Fed would continue to reinvest the proceeds from bond purchases as they mature. The Fed could begin to halt some or all of the reinvestment when it thinks it's time to begin tightening monetary policy. Doing so, he said, would be akin to raising rates.

Just as significant was what Bernanke wasn't asked.

There were no questions about the lawsuit from two news organizations that forced the Fed to release the names of all the firms it aided during the financial crisis. Nor were there questions about attempts in Congress to require an audit of the Fed, or a range of controversies over the implementation of last year's sweeping legislative revamp of financial regulation, where the Fed gained new powers.

The Fed chairman also got a huge pass during the news conference. Asked about rising oil prices, Bernanke appeared to contradict President Barack Obama and members of the Commodity Futures Trading Commission, which regulates the trading of oil contracts.

Bernanke suggested that fundamental issues explain the high prices, even though the president and a growing number of economists, including Bernanke's predecessor, Alan Greenspan, think that excessive speculation by Wall Street firms adds a significant premium to the price of oil.

"Our interpretation of the increase in gas prices is economists' basic mantra of supply and demand. On the one hand we have a rapidly growing global economy, emerging markets are growing very quickly and their demand for commodities, including oil, is very, very strong," the Fed chief said. "Essentially all of the increase in the demand for oil in the last couple of years, in the last decade, has come from emerging market economies. In the United States, our demand for oil, our imports, has actually been going down over time."

He added, "And on the supply side, as everybody knows who watches television, we've seen disruption in the Middle East and North Africa, Libya and other places, that has constrained supply."

Actually, U.S. and global oil consumption continue to rise, but energy experts such as oil historian Daniel Yergin have noted that technology and new global producers are allowing supplies to increase in kind. Saudi Arabia has said it offset the lost Libyan oil production, which wasn't a significant amount anyway, and today there's ample excess production capacity globally, unlike July 2008 when oil hit a record $147 a barrel.

Meanwhile, the amount of so-called paper contracts for oil — owned by financial firms who trade oil with no intent of taking possession of it — has increased exponentially. It's why Obama announced the formation of an interagency task force last week, led by the Justice Department, to look at excessive oil speculation, and regulatory sources confirmed to McClatchy that market manipulation is under investigation.


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