On Friday, Federal Reserve Chairman Ben Bernanke gave a speech entitled “The Economic Outlook and Monetary Policy” at the Federal Reserve Bank of Kansas City Symposium. In his speech, Chairman Bernanke focused on the current economic outlook, the Federal Reserve’s response and future policy options “should the recovery falter or inflation decline further.”

With respect to the current economic outlook, Chairman Bernanke noted that “[f]or a sustained expansion to take hold, growth in private final demand—notably, consumer spending and business fixed investment—must ultimately take the lead.” According to Bernanke, the U.S. has experienced growth in these areas, but “the pace of that growth recently appears somewhat less vigorous than we expected.” Looking ahead, though, Bernanke remained positive, stating that “[d]espite the weaker data seen recently the preconditions for a pickup in growth in 2011 appear to remain in place.” However, his positive outlook did not appear to include unemployment, as he noted that “[i]ncoming data on the labor market have remained disappointing” and “[a]lthough output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy.”

Chairman Bernanke also discussed recent Federal Reserve policies used to “support economic recovery and price stability.” In this context, Bernanke highlighted the work of the Federal Open Market Committee (FOMC), noting that “since March 2009, the [FOMC] has consistently stated its expectation that economic conditions are likely to warrant exceptionally low policy rates for an extended period” and that “[m]arket expectations for continued accommodative policy have in turn helped reduce interest rates on a range of short- and medium-term financial instruments to quite low levels….” He also discussed the FOMC’s steps to “improve market functioning and to push longer-term interest rates lower through its large-scale purchases of agency debt, agency mortgage-backed securities (MBS), and longer-term Treasury securities….” Following these purchases, Bernanke explained that the FOMC decided to “reinvest payments of principal on agency securities into longer-term Treasury securities” after it acknowledged that expected repayments on agency debt and MBS without reinvesting the proceeds, as originally planned, could reduce current “policy accommodations.”

Finally, Chairman Bernanke analyzed three potential “policy options” that the Federal Reserve could use to provide “additional stimulus” and “further policy accommodations” if necessary. The strategies included “(1) conducting additional purchases of longer-term securities, (2) modifying the [FOMC’s] communication, and (3) reducing the interest paid on excess reserves.” He also explained his opposition to a fourth policy option that had been proposed by several economists, in which the FOMC would “increase its medium-term inflation goals above levels consistent with price stability,” stating that “such a strategy is inappropriate for the United States in current circumstances.”

In closing Chairman Bernanke stated that “[t]ogether with other economic policymakers and the private sector, the Federal Reserve remains committed to playing its part to help the U.S. economy return to sustained, noninflationary growth.”