WASHINGTON (MNI) – The following are the second set of remarks of
Federal Reserve Chairman Ben Bernanke, prepared for a panel discussion
Friday following his speech, at the European Central Bank, titled
“Emerging from the Crisis: Where Do We Stand?”:

The last time I was here at the European Central Bank (ECB), almost
exactly two years ago, I sat on a distinguished panel much like this one
to help mark the 10th anniversary of the euro. Even as we celebrated the
remarkable achievements of the founders of the common currency, however,
the global economy stood near the precipice. Financial markets were
volatile and illiquid, and the viability of some of the world’s leading
financial institutions had been called into question. With asset prices
falling and the flow of credit to the nonfinancial sector constricted,
most of the world’s economies had entered what would prove to be a sharp
and protracted economic downturn.

By the time of that meeting, the world’s central banks had already
taken significant steps to stabilize financial markets and to mitigate
the worst effects of the recession, and they would go on to do much
more. Very broadly, the responses of central banks to the crisis fell
into two classes. First, central banks undertook a range of initiatives
to restore normal functioning to financial markets and to strengthen the
banking system. They expanded existing lending facilities and created
new facilities to provide liquidity to the financial sector. Key
examples include the ECB’s one-year long-term refinancing operations,
the Federal Reserve’s auctions of discount window credit (via the Term
Auction Facility), and the Bank of Japan’s more recent extension of its
liquidity supply operations. To help satisfy banks’ funding needs in
multiple currencies, central banks established liquidity swap lines that
allowed them to draw each other’s currencies and lend those funds to
financial institutions in their jurisdictions; the Federal Reserve
ultimately established swap lines with 14 other central banks. Central
banks also worked to stabilize financial markets that were important
conduits of credit to the nonfinancial sector. For example, the Federal
Reserve launched facilities to help stabilize the commercial paper
market and the market for asset-backed securities, through which flow
much of the funding for student, auto, credit card, and small business
loans as well as for commercial mortgages. In addition, the Federal
Reserve, the ECB, the Bank of England, the Swiss National Bank, and
other central banks played important roles in stabilizing and
strengthening their respective banking systems. In particular, central
banks helped develop and oversee stress tests that assessed banks’
vulnerabilities and capital needs. These tests proved instrumental in
reducing investors’ uncertainty about banks’ assets and prospective
losses, bolstering confidence in the banking system, and facilitating
banks’ raising of private capital. Central banks are also playing an
important ongoing role in the development of new international capital
and liquidity standards for the banking system that will help protect
against future crises.

Second, beyond necessary measures to stabilize financial markets
and banking systems, central banks moved proactively to ease monetary
policy to help support their economies. Initially, monetary policy was
eased through the conventional means of cuts in short-term policy rates,
including a coordinated rate cut in October 2008 by the Federal Reserve,
the ECB, and other leading central banks. However, as policy rates
approached the zero lower bound, central banks eased policy by
additional means. For example, some central banks, including the Federal
Reserve, sought to reduce longer-term interest rates by communicating
that policy rates were likely to remain low for some time. A prominent
example of the use of central bank communication to further ease policy
was the Bank of Canada’s conditional commitment to keep rates near zero
until the end of the second quarter of 2010. (1) To provide additional
monetary accommodation, several central banks — among them the Federal
Reserve, the Bank of England, the ECB, and the Bank of Japan —
purchased significant quantities of financial assets, including
government debt, mortgage-backed securities, or covered bonds, depending
on the central bank. Asset purchases seem to have been effective in
easing financial conditions; for example, the evidence suggests that
such purchases significantly lowered longer-term interest rates in both
the United States and the United Kingdom. (2)

Although the efforts of central banks to stabilize the financial
system and provide monetary accommodation helped set the stage for
recovery, economic growth rates in the advanced economies have been
relatively weak. Of course, the economic outlook varies importantly by
country and region, and the policy responses to these developments among
central banks have differed accordingly. In the United States, we have
seen a slowing of the pace of expansion since earlier this year. The
unemployment rate has remained close to 10 percent since mid-2009, with
a substantial fraction of the unemployed out of work for six months or
longer. Moreover, inflation has been declining and is currently quite
low, with measures of underlying inflation running close to 1 percent.
Although we project that economic growth will pick up and unemployment
decline somewhat in the coming year, progress thus far has been
disappointingly slow.

In this environment, the Federal Open Market Committee (FOMC)
judged that additional monetary policy accommodation was needed to
support the economic recovery and help ensure that inflation, over time,
is at desired levels. Accordingly, the FOMC announced earlier this month
its intention to purchase an additional $600 billion of longer-term
Treasury securities by the end of the second quarter of 2011, a pace of
about $75 billion per month. The Committee also will maintain its
current policy of reinvesting principal payments from its securities
holdings in longer-term Treasury securities. Financial conditions eased
notably in anticipation of the Committee’s announcement, suggesting that
this policy will be effective in promoting recovery. As has been the
case with more conventional monetary policy in the past, this policy
action will be regularly reviewed in light of the evolving economic
outlook and the Committee’s assessment of the effects of its policies on
the economy.

(1 Recent work at the Bank of Canada (see He, 2010) suggests that
the bank’s forward guidance may have pushed back expectations of when
policy accommodation would be withdrawn. For a differing view, see
Chehal and Trehan (2009).)

(2 For the United States, see Gagnon and others (2010), D’Amico and
King (2010), and Hamilton and Wu (2010); for the United Kingdom, see
Joyce and others (2010).)

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** Market News International Washington Bureau: 202-371-2121 **

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