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Bernanke's news conference on Fed policy

WASHINGTON (Reuters) - Below are highlights from Federal Reserve Chairman Ben Bernanke's news conference following the Fed's policy meeting on Wednesday.

BERNANKE ON DECISION TODAY BEING PRECAUTIONARY STEP:

"We want to make sure that the economy has adequate support, and in particular, it's less surprising the market or easing policy (than) it is avoiding a tightening until we can be comfortable that the economy is, in fact, growing the way we want it to be growing."

"So this was a step -- it was a step, a precautionary step, if you will. It was an intention -- the intention is to wait a bit longer and to try to get confirming evidence to whether or not the economy is, in fact, conforming to this general outlook that we have."

BERNANKE ON FED COMMUNICATION AND FINANCIAL TIGHTENING:

"As of June, we had made meaningful progress in labor market conditions, and the Committee thought that was the time to begin talking about how the eventual wind-down of the program would take place and how it would be tied to the evolution of economic variables."

"All of that was very consistent with what we said when we began the program, that our goal was to achieve a substantial improvement in the outlook for the labor market, and we needed to communicate how that was going to be put into practice.

"Failing to communicate that information would have risked creating a large divergence between market expectations, public expectations, and what the Committee's intentions were, and that could have led to much more serious problems down the road. So I think the communication was very important."

BERNANKE ON EMERGING MARKETS:

"It is true that changes in longer-term interest rates in the United States, but also in other advanced economies, does have some effect on emerging markets, particularly those who are trying to peg their exchange rate, and can lead to some capital inflows or outflows. But there are also other factors that affect inflows and outflows. Those include changes in risk preference by investors, changes in growth expectations, different perceptions of institutional strength within emerging markets across different countries.

"What we're trying to do with our monetary policy here, as I think my colleagues in emerging markets recognize, is trying to create a stronger U.S. economy. And a stronger U.S. economy is one of the most important things that can happen to help the economies of emerging markets."

BERNANKE ON RELUCTANCE TO RAISE RATES WHEN INFLATION IS LOW:

"We should be very reluctant to raise rates if inflation remains persistently below target, and that's one of the reasons that I think we can be very patient in raising the federal funds rate since we have not seen any inflation pressure.

BERNANKE ON FED'S FORWARD GUIDANCE:

"On having an inflation floor, that would be in addition to the guidance. We are discussing how we might clarify the guidance on the federal funds rate. That is certainly one possibility."

"As I mentioned earlier, the Committee has regularly reviewed the forward guidance, and there are a number of ways in which the forward guidance could be strengthened.

There are other steps that we could take. We could provide more information about what happens after we get to 6.5 percent (unemployment) and those sorts of things. And to the extent that we could provide precise guidance, I think that would be desirable."

BERNANKE ON REGRETS:

"The biggest regret I have is that we didn't forestall the crisis. I think once the crisis got going, it was extremely hard to prevent. I think we did what we could, given the powers that we had, and I would agree with Hank (Paulson) that we were motivated entirely by the interest of the broader public, that our goal was to stabilize the financial system so that it would not bring the economy down, so that it would not create massive unemployment and economic hardship that ... would have been even more severe by many times than what we actually saw."

BERNANKE ON FISCAL BATTLES IN WASHINGTON:

"A government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy, and the Federal Reserve's policy is to do whatever we can to keep the economy on course. And so if these actions led the economy to slow, then we would have to take that into account, surely.

"So this is one of the risks that we are looking at as we think about policy.

"That being said, you know, again, our ability to offset these shocks is very limited, particularly a debt limit shock, and I think it's extraordinarily important that Congress and the administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills, and that we avoid any kind of event like 2011, which had, at least for a time, a noticeable adverse effect on confidence on the economy."

BERNANKE ON BEING OVERLY OPTIMISTIC ON GROWTH:

"We have been over-optimistic about (growth). It appears again that the potential rate of growth of the economy has been slowed somewhat, at least temporarily, by the - by the recession and the financial crisis, and you can see that in the slower productivity figures.

"Now, we haven't anticipated that slowdown in productivity, and that's one of the reasons we haven't anticipated the relatively slow growth.

"It's important to recognize though that what monetary policy affects is not the potential rate of growth, long-run rate of growth, but rather the cyclical part, the deviation of output and employment from its normal level. In predicting the amount of slack in the economy, so to speak, we've done a little better. Our predictions of unemployment for example have been better than our predictions of growth

"And in particular, one thing that's been quite striking is that unemployment, we were too pessimistic on unemployment for this year."

BERNANKE ON TIGHTENING FINANCIAL CONDITIONS:

"I think part of the reaction we've seen, it comes from a number of sources. Part of it comes from improved economic news. And part of the reason why rates have gone up in other countries as well as in the United States, and that -- to the extent that tighter financial conditions reflect a better outlook, that's a good thing, and that's not a problem at all.

"Part of it reflects views about monetary policy, and that we want to make sure we get straight. And that's why, to answer the earlier question again, it's why communication is so important. We need to explain as best we can how we're going to move, and on what basis we're going to move."

BERNANKE ON NO FIXED TIMING FOR TAPERING, NO MAGIC NUMBER:

"So there is no fixed calendar, schedule: I really have to emphasize that. If the data confirm our basic outlook, if we gain more confidence in that outlook and we believe that the three-part test that I mentioned is, indeed, coming to pass, then we could move later this year.

"We could begin later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy. So we are tied to the data. We don't have a fixed calendar schedule. But we do have the same basic framework that I described in June.

"The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market. Last time I gave 7 percent (jobless rate) as an indicative number to give you some sense of, you know, where that might be....

"There is not any magic number that we are shooting for, we are looking for overall improvement in the labor market.

BERNANKE ON POSSIBLE TAPER THIS YEAR:

"We have a three-part baseline projection, which involves increasing growth that's picking up over time, as fiscal drag is reduced; continuing gains in the labor market; and inflation moving back towards objective. We are looking to see in the coming meetings ... if the data confirm that basic outlook. If it does, we'll take the first step at some point, possibly later this year, and then continue so long as the data are consistent with that continued progress. And so that basic structure is still in place."

BERNANKE ON LABOR MARKET PARTICIPATION RATE:

"I think there is a cyclical component to participation, and in that respect, the unemployment rate understates the amount of sort-of true unemployment, if you will, in the economy. But on the other hand, there's also a downward trend in participation in our economy, which is arising from factors that have been going on for some time, including an aging population, lower participation by prime-age males, fewer women in the labor force, other factors which aren't really related to this recession.

"Over the last year, the unemployment rate has dropped by eight-tenths of a...point. The participation rate has dropped by three-tenths of a percentage point, which is pretty close to the trend.... I think it would be fair to say most of the improvement in the unemployment rate -- not all, but most of it in the last year is due to job creation rather than lower participation."

BERNANKE ON QE3 NOT PRESET COURSE; WHY FED DIDN'T MOVE:

"Asset purchases are not on a preset course. The Committee's decisions about their pace will remain contingent on the economic outlook and on the Committee's ongoing assessment of the likely efficacy and cost of the program."

"In evaluating whether a modest reduction in the pace of asset purchases would be appropriate at this meeting however, the Committee concluded that the economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such a reduction. Moreover the Committee had some concern that the rapid tightening of financial conditions in recent months would have the effect of slowing growth ... a concern that would be exacerbated if conditions tightened further.

BERNANKE ON CONDITIONS FOR TAPERING:

"At the meeting concluded earlier today, the sense of the Committee was that the broad contours of the medium-term economic outlook, including economic growth sufficient to support ongoing gains in the labor market and inflation moving towards its objective, were close to the views it held in June.

"But in evaluating whether a modest reduction in the pace of asset purchases would be appropriate at this meeting, however, the Committee concluded that the economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such a reduction. Moreover, the Committee has some concern that the rapid tightening of financial conditions in recent months could have the effect of slowing growth, as I noted earlier, a concern that would be exacerbated if conditions tighten further."

BERNANKE ON UNEMPLOYMENT, GROWTH RATES:

"At 7.3 percent, the unemployment rate remains well above acceptable levels."

"The downside risks to growth have diminished on net over the past year reflecting among other factors somewhat better economic factors in Europe and increased confidence on the part of households and firms in the staying power of the U.S. recovery."

BERNANKE ON THE LABOR MARKET:

"As I noted earlier, conditions in the job market today are still far from what all of us would like to see. Nevertheless, meaningful progress has been made in the year since we announced the asset purchase program. For example, the unemployment rate has fallen from 8.1 percent at the time of our announcement to 7.3 percent today. And about 2.3 million private sector jobs have been created over the same period."

(Washington newsroom)

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