lunch." for sue herera, i'm tyler mathisen. "street signs" begins right now with breaking news on the fed's growth forecast. hello and welcome to "street signs." we are just minutes away from ben bernanke's news conference. but before we get to that, and it could be a big one, folks, we want to hear what the fed chairman has to say in the q & a session. steve liesman is in washington with the breaking news and the fed's economic forecast. steve. >> brian, it's an interesting one. the fed forecast turning a bit more hawkish. fed members forecasting now more tightening in 2014 than they did in the forecast in january. this being the second time historically the fed has ever published its outlook for the fed's fund rate. fed members less likely to see tightening later than 2014. nobody's in 2016. the same number in 2015. two more fomc members now see the first tightening in 2014

compared to the january forecast. seven members see a funds rate at 2% or higher in 2014. that compares with only five in the january forecast. six members are still see tightening in 2012 and 2013. so nobody's become way more hawkish. just a bit more hawkish on the long end, if you will. and part of that has all come with a change in the forecast. the federal reserve now forecasting the 2012 unemployment rate will be below 8%. i don't remember the last time that happened, but it's been a while. 7.9% is now the forecast. that's down from 8.35%. and you can see all along the spectrum there forecast lower unemployment. they've also forecast somewhat higher inflation. up now 1.95 on the headline pce inflation index for this year. that's up pretty considerably. 35 basis points from the january forecast. and all along the line there until 2014 there's something of a bump up on gdp. a little bit better growth this

year, but a little bit worse in the outlying years. if you look at gdp 2012 marked up to 265 down from 2.45. brian, a very clear takeaway here is at least when it comes to the superdoves, they've dialed back a bit. the hawks remain pretty much the same. big question about 2014. that number where now seven are forecasting -- seven members of the fomc forecast a 2% funds rate or higher. i think it's going to get the market's attention, brian. >> absolutely. let's find out what kind of attention the market is paying. let's get to bob and rick. bob, to you first of all. earlier when we got the statement you were saying there wasn't really anything that we could take away here considering that the fed is essentially stuck. now it looks as if the forecasts getting more hawkish. what kind of forecast do you think we're seeing down there? >> it's certainly interesting. higher inflation, higher gdp, lower unemployment. generally should be interesting for the stock market. take a look at what the s&p 500 which rose just a little bit as you see here as we got the fed

announcement. and it's basically still holding on. bank stocks, which would benefit from higher interest rates, we could use a steeper yield curve because you make money on it. but just below where we were about four or five minutes ago to the fed's announcement. higher inflation would imply a steeper yield curve. utilities here, capital investment companies like utilities could potentially be hurt by higher interest rates. just slightly off the highs as well. i would say the reactions here fairly modest so far. but certainly very interesting shift in perspective from the fed's point of view. >> yeah, it is. i want to go back to steve. steve, i have a question there. if seven fomc officials now see rate hikes in 2014 versus five before, is there a way to look at that somehow as dovish? were those folks that thought we'd see a rate hike in 2013? or have they pull that had forward? >> no. these were guys who were later. in fact, i thought they'd made a mistake in the official forecast, brian, because they

left the year 2016 out. took me a second to realize that's because nobody is now forecasting the first rate hike at 2016. in the january forecast there were two members. i want to say about the gdp and the unemployment forecast. i think a lot of what's happened here, brian, is the fed catching up with reality of what's happened in the period. i think the bigger change is what's happened to the forecast here. you've had a coming off in the superdovish ee isish end. but no movement towards more hawkishness except in 2014. >> absolutely. in light of all this let's quickly bring up the chart for what's happening with gold. gold is falling back down again. i think it's not over session lows as we speak but still down about $8 a troy ounce. i also want to bring in rick santelli here. rick, earlier on you were saying you need to watch all the action that was happening in the 30-year because nothing earlier was mentioned regarding extending the twist. in light of what we've just heard now, what's happening with treasuries? >> you're almost getting -- well, you have gotten an equal

size reaction. about three basis points higher in yield on the 10s and 30s since that forecast that steve was discussing hit the marketplace. now, i'm not saying that a jump from 2% to 2.03 in the 30-year 3.15 to 3.18 is huge because if they truly believe that the economy was going to be significantly better, we'd move 30 basis points. but i think it is important of the direction. we shaved off a boat load of gains on the stock market. we just saw a selloff in treasuries and a rally in the dollar. and pretty much that's predicated on a better economy, higher interest rates. and i think that's very important to keep in mind. >> rick, thank you very much. again, we are just minutes away from ben bernanke's news conference. and while we await that, let us bring in gina sanchez, cnbc contributor and director of asset strategy. and james camp onset managing

director of fixed income at eagle asset management. as mandy has said many times, gina, it's ladies first. i want to get to europe. they've added a line about financial conditions. was that a direct shot across the bow that the fed is maybe more worried about europe than they are letting on? >> i think the fed is certainly concerned about europe. there's very good reason to be. i think what it does is it continues to open the door for more action, more easing later if necessary. and it opens that door through europe. i think ben is just trying to keep his options open. >> he's always tried to keep his options open. i want to follow-up when you say there's the potential there for more action. what form would that action take? and when would it be, gina? >> well, we think that politically if qe-3 doesn't materialize before the july fomc meeting, then it's probably really off the table. and so some time before then it's going to be the timing, if we do hear it.

also, politically, something that is sterilized would be more likely. something that doesn't actually extend the balance sheet. that's also to us a more likely action. but, you know, right now you're right. what we've heard is comments that things are getting a bit more hawkish. but we still think the door's open. and our concerns regarding second half growth are probably a little greater than the fed's in aggregate. >> in terms, james, of fixed income here and what investors should be doing, what's the trade off the fomc. >> i don't think you can give up on the treasury market. the quantitative easing that the fed may have needed to do has been done by europe over the last three or four weeks. in terms of the distribution of the fed move over 2014, i don't think that's a big change. the votes that matter are dudley and bernanke. and i think he's firmly committed to an easing policy

through 2013. i think the data are ambiguous and i'm going to be interested to see if the fed chairman gives himself an out at this press conference. an out either in the form of europe rolling over, which i think it is, the housing market, which he's talked about, or the lack of fiscal stimulus that will come offline in 2013. >> tom, you're a smart guy, but the people in the fomc are also smart folks. what i don't understand is how can they look out two and a half plus years to say this is when we're going to raise rates? somewhere as far as 2016. do you as a highly respected economist have that kind of visibility? >> no one does. i think it's almost comical that we put so much emphasis on what these guys think is going to happen. >> bingo. >> i think it's silly. we believe they never should have gone that route in putting an actual date on when they wanted to raise rates. i think you just get back to the bigger conversation, i think what we've received from them thus far today is definitely more on the hawkish side. i think the statement itself was

hawkish. there's no question that they definitely marked down their assessment of the european situation. but i think if you look through the rest of the statement, they didn't ding labor market conditions. they certainly could have with the 120,000 jobs created last month. and they actually gave more credence to the idea that economic growth is going to continue to move along in the more near-term. i think again even to me that's sort of inexplicable given the headwinds in place. nevertheless, i think bernanke has an opportunity here. if he wants to sort of suppress this hawkish rhetoric, this hawkish tone we've received from them, he has an opportunity at 2:15. i'm growing with the mind that probably a high hurdle to see that today. >> i am going to ask you after the break what you would like to ask ben bernanke if indeed you are there at 2:15. tom, james, gina, stay with us. we'll get back to you in just a second. >> that's right. we are waiting ben bernanke's press conference. could be a big one. there's a live shot of the podium. i would like to ask the podium a question. why are you so shiny? we're back after this. [ male announcer ] if you believe the mayan calendar,

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welcome back everybody. let's take a look at what the dollar is up to. at this stage it seems to be spiking somewhat. it's currently at 79.24. you can see it's only about flat in terms of percentage gains, but you can certainly see in terms of the chart movement it is spiking there as about 12 minutes ago. we got our forecast from the fed that did seem to turn a little more hawkish. in the meantime, we are awaiting the news conference from big ben, ben bernanke. in the meantime why don't we bring back in our guests. we have gina sanchez, tom

porcelli. do you feel that the date of 2014 has been somewhat overplayed? >> well, i think in terms of its effect on the real economy, perhaps. but the fed's signaling mechanism here, mandy, so me is all about allowing the banks and financial system complete clarity. it's the one part of our policy world that has been unambiguous and clear. if we look at what bank balance sheets really look like, a lot of treasury buying, a lot of federal agency buying, not a lot of loan growth. i don't know that the transition mechanism is necessary for the real economy if it's just going to continue to heal the system. >> i love that point of view. gina, do you agree with that? essentially what james is saying is let's continue to give the gift of cheap money to america's troubled banks. >> well, not only helps america's troubled banks but also helps the american

investor. the best equity markets is cheap money -- >> not the bond, not the fixed income investor. herb greenberg here he's a fixed income guy. he's ticked off. >> i'm sure he is. but at the end of the day -- >> yes. >> at the end of the day i think cheap money is helping to sort of bridge. our view is that we are still not in a self-sustained recovery. we are still in a very policy-affected recovery. and that isn't really going to change. we don't see any signs that that's going to change. our concerns for second half growth are on aggregate probably slightly greater than that of the fed. >> uh-huh. >> and whereas we don't see the catalyst for that kind of a self-sustaining growth. we see a fiscal austerity cliff happening in 2013. that will start to price into markets in the second half of 2012. inventories was a big boost. that's going to go away. we also saw better weather that

led to more construction. that's also going to fade. what leads growth higher in the second half? >> that's a good question. and, tom, you're mr. economy here. can you answer that? essentially how much is this cheap money? how much are these extended low rates really helping the u.s. economy? >> it's not. i mean, one of the sad truths about the current backdrop is few people have been able to take advantage of these low rates. i think an important point here -- >> okay. i'm sorry, tom. i have to cut in here because ben bernanke is sitting down for the news conference. let's listen in. >> good afternoon. before we get to questions, i'll summarize today's policy action by the committee and i'll place the policy decision in the context of our economic outlook and our collective judgment regarding the appropriate path of monetary policy. as indicated in the statement released earlier this afternoon, the committee is maintaining the

highly accommodative policies that we initiated at previous meetings. we decided to keep the target range for the federal funds rate at 0% to .04%. and we continue economic conditions are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. our program to extend the average maturity of the federal reserve security holdings announced in september will continue as scheduled. each of these policy actions is intended to foster accommodative financial conditions that support the economic recovery in a context of price stability. in conjunction with today's meetings, fomc participants, the five board members and 12 reserve bank presidents, submitted their individual economic projections and policy assessments for the years 2012 to 2014 and over the long run. these projections serve as important inputs into the committee's deliberations.

incoming information suggests that the economy's been expanding moderately. most committee participants expect economic growth remain moderate over coming quarters and then to pick up gradually. among other factors and notwithstanding science of improvement, the ongoing weakness in the housing sector represents a weakness in recovery. less pronounced than last fall continue to pose significant risk to the outlook. labor market conditions have improved in recent months with the unemployment rate having fallen nearly a percentage point since august. however, at 8.2%, the unemployment rate remains elevated. looking ahead, the committee anticipates that the unemployment rate will decline gradually over the next several years reflecting the moderate pace of economic growth. specifically, participants projections for the unemployment rate in the fourth quarter of this year have a central tendency of 7.8% to 8.0% declining to 6.7% to 7.4% in the

first quarter of 2014. for comparison, participants estimates of the longer run normal rate of unemployment have a central tendency of 5.2% to 6.0%. inflation has picked up somewhat mainly reflecting higher gasoline prices. however, as has been the case for other recent swings in oil prices, the committee expects that effect to be only temporary. moreover, survey measures and financial market indicators continue to show stability and longer term inflations. consequently we anticipate that inflation will subsequently run at or below the committee's longer run goal of 2%. in particular, participants projections of inflation have a central tendency of 1.9% to 2.0% for 2012. and 1.7% to 2.0% for 2014. the economic projections submitted by fomc participants are conditioned on their individual assessments of the appropriate path of monetary

policy. as you can see from the chart labeled appropriate timing of policy firming, committee participants have a range of views about when the initial increase in the federal funds rate is likely to be appropriate. following a careful discussion of those views at today's meeting, the fomc maintained its collective judgment that economic conditions will likely warrant exceptionally low levels for the federal funds rate at least through late 2014. in particular, a highly accommodative stance on monetary policy is warranted in light of the per sis tense of the recovery and the ongoing risk of the economic outlook. finally the committee took noted decisions regarding the federal reserve balance sheet today. but we remain prepare today adjust our securities holdings as appropriate to promote a stronger economic recovery in the context of price stability. thank you. i'd be glad to take your questions.

>> thank you mr. chairman. some of your critics -- i'm sure you're not going to be surprised, think that you're too cautious. inflation is subdued, economy is slowing, i know you talked about the balance sheet, given that, is the committee any closer to qe-3 than it was at its last meeting? >> well, first, the committee has certainly been bold and aggressive in terms of easing monetary policy. we've maintained the federal funds rate close to zero since late 2008. we've had two rounds of so-called quantitative easing. we've had a maturity extension program, which is ongoing. we have offered guidance about the federal funds rate that goes into at least late 2014. so we have been very accommodative. and we remain prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target.

so in particular we'll continue to assess, you know, looking at the economic outlook, looking at the risks, whether or not unemployment is making sufficient progress towards its longer run normal level, and whether inflation is remaining close to target. and if appropriate and depending also on assessment of the costs and risks of additional policy actions, we remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives. so those tools remain very much on the table. and we will not hesitate to use them should the economy require that additional support. >> mr. chairman, "the wall street journal," the fed has been forecasting for some time that inflation would fall to 2% or below. the latest measures of inflation suggest that the core pcs at the higher end of that range and

many other measures are above 2%. i noticed that in your forecast today that the upper end of your forecast all the way through 2014 have increased. do you see a risk that the disinflationary forces in the economy might not be as strong as the fed had been projecting for some time? >> well, i would just say first that our projections still have inflation very close to our 2% target. as you point out, core inflation and some other measures of underlying inflation had been a little stronger than expected. but i would say first that some of the movement in the first quarter, for example, seems to have come from transitory sources like nonmarket components. and the fundamentals of inflation in particular inflation expectations, the amount of slack in the economy, the commodity price behavior, which has been relatively well

controlled in recent months, all those things suggest inflation is going to stay close to or perhaps a bit below our 2% target. now, as i mentioned in the opening remarks and as we said in our briefing, the recent rise in gasoline prices has created a temporary bulge in headline inflation and overall inflation. but we expect that to pass through the system. and assuming no new shocks in the oil sector, inflation ought to moderate to about 2% later this year. [ inaudible question ] >> the lower bound rose -- again, this represents 17 distinct views. but i would guess that the reason is the data have come in a little bit firmer, core inflation has been a little stronger than it was expected, but those differences are not particularly large.

>> mr. chairman, reuters, we know that the committee foresees -- rates this thing very low until late '14. what is your personal view on the timing of the first rate hike -- on the likely timing? and do you see easing at the moment or neutral? could it go either way? >> well, i'm very comfortable with the consensus view that we enunciated today and i think the committee broadly is comfortable, nine-to-one vote in favor of this guidance. so, again, that represents a very accommodative stance of policy. our intention is maintained highly accommodative stance of policy for the foreseeable future. and we remain able and willing to take further action than necessary. at the same time, i think it's worth noting that the forward guidance on the federal funds rate is conditional on the data. and if the data were to come in much stronger than expected, we would adjust the guidance

appropriately. so it's not unconditional. it does depend on how the outlook evolves. and, again, should the outlook strengthen notably, then we would have to respond to that. >> how much more weakness would you need to see -- [ inaudible question ] >> the question is, you know, how much more weakness do we need. the committee has to make those assessments. and we've been working to try to provide more explicit guidance, quantitative guidance, about our policy reaction function. but so far, you know, we haven't really done that. and i can only say qualitatively that the committee will continue to look at the evolution of the outlook, try to assess whether unemployment is making sufficient progress towards our objectives. and in particular whether the recovery is still continuing. and we remain prepared to use balance sheet tools to support the recovery and to help make sure unemployment continues its downward path towards longer run

normal levels. [ inaudible question ] >> mr. chairman, according to the latest forecast, ten members of the fomc see a 1% or higher fed funds rate in 2014. seven of them see a 2% or higher fed funds rate. under that -- those conditions, how can the guidance in the statement that you remain exceptionally low through late 2014 be justified? and is there a point at which the disdense between the individual forecast and guidance get to a point where one or the other is no longer attainable? >> well, certainly there's a range of views, as you've noted. but these projections are inputs into a committee process. and it's in the committee meeting, we had yesterday and today, where we debate not only the possible outcomes, but also the risks, the uncertainties, all the things that inform our

collective judgment. and as i said, the committee had no difficulty coming to a consensus that the guidance that we gave is still appropriate. again, if there's a substantial change in the economic outlook in either direction, then the guidance would change appropriately. but for now i think the committee is comfortable with consensus statement that we put out. >> do you worry about creating confusion in the market between the guidance and the individual forecast? >> well, again, the individual projections are inputs to the committee decision. so the committee decision is the critical element in that respect. we are continuing to work to become more transparent. and we have a variety of things that we're looking at. so you'll have to stay tuned for that. but, again, the committee was quite comfortable with the consensus that we have reported

today. >> unemployment is too high. and you said you expect it to remain too high for years to come. inflation is under control. and you say that you expect it to remain under control. you say that you have additional tools available for you to use, but you're not using them right now. under these circumstances, it's really hard for a lot of people to understand why you are not using those tools right now. could you address that? and specifically could you address whether your current views are inconsistent with the views on that subject that you held as an academic. >> yeah. let me tackle that second part first. so there's this view circulating that the views i expressed about 15 years ago on the bank of japan are somehow inconsistent with our current policies. that is absolutely incorrect. my views and our policies today are completely consistent with the views that i held at that time. i made two points at that time

to the bank of japan. the first was that i believe a determined central bank could and should work to eliminate deflation. that is falling prices. the second point that i made was that when short-term interest rates hit zero, the tools of a central bank are no -- are not exhausted. there are still other things that the central bank can do to create additional accommodation. now, looking at the current situation in the united states, we are not in deflation. when deflation became a significant risk in late 2010 or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2% target. likewise, we have been aggressive in creating and using nonfederal funds rate centered tools to achieve additional accommodation for the u.s. economy. so the very critical difference between the japanese situation 15 years ago and the u.s.

situation today is that japan was in deflation. and clearly when you're in deflation and in recession then both sides of your mandate, so to speak, are demanding additional accommodation. in this case we are not in deflation. we have an inflation rate close to our objective. now, why don't we do more? well, first, i would again reiterate that we are doing a great deal. policy's extraordinarily accommodativ accommodative. i won't go through the list again, but you know all the things we have done to try to provide support to the economy. i guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increase pace reduction in the unemployment rate. the view of the committee is that that would be very

reckless. we at the federal reserve have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we've been able to take strong accommodative actions in the last four or five years to support the economy without leading to an unanchoring of inflation expectations or destabilization of inflation. to risk that asset for what i think would be quite tentative and perhaps doubtful gains on the real side would be, i think, unwise thing to do. >> thank you. given your warnings to lawmakers about the looming fiscal cliff, do you think the fed has to take into account when congress chooses to take action? if they waited to january, say, would you feel obligate today take into the potential economic

blow into account? >> well, i think we'll have to take fiscal policy into account to some extent, but i think it's very important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there's i think absolutely no chance that the federal reserve could or would have ability whatsoever to offset that effect on the economy. so, as i have said many times before, it's imperative for congress to give us a fiscal policy that achieves two principle objectives. the first is of course to achieve fiscal sustainability over the longer term. that is critical. that's something that needs to be addressed. at the same time i think that can be done in a way that doesn't endanger the short-term recovery of the economy. and i am concerned that if all the tax increases and spending cuts that are associated with

the current law and which would take place absent any congressional action were to occur on january 1st, that would be significant risk to the recovery. i'm looking and hoping congress will take actions that will address both sides of that -- both requirements of a good fiscal policy. >> mr. chairman, "bloomberg news." in today's statement you said after coming quarters you expect the economy to pick up gradually. we see the forecast for 2013 and 2014 the growth forecast is downgraded. what caused you to downgrade your forecast for 2013 and 2014 when you see a pick-up after coming quarters? >> well, again, these are the views of the participants, the 17 participants. so the basic feature that is

described in our statement, which is that growth seems likely to pick up over time is still obviously in our projections. the 2013 numbers are stronger than the 2012 numbers. and the 2014 numbers are stronger than the 2013 numbers. and the reason for that expected pick-up over time is, first, very accommodative monetary policy which continues to provide support for the recovery. but in addition, some of the headwinds that have been affecting our recovery, such as the housing market, financial stresses, credit tightness and so on, some of those things, we hope, will be lifting over time and will allow the economy to grow more quickly and approach more quickly its longer run full employment level. the reason -- i don't know precisely why there's been a slight downgrade in years further out, but i suspect that the fiscal issues may be part of

that. >> mr. chairman, you've made the inflation target sound a little bit more like an inflation ceiling. you suggested that breaching that ceiling or target would hurt the fed's credibility. could you explain a little more about why you think going 50 basis points or a full percentage point above the 2% target would hurt the fed's credibility? and what that would do on the unemployment side if you were to do that. >> so it's not a ceiling. it's a symmetric objective. we tend to bring inflation close to 2%. in particular if inflation were to jump for whatever reason -- we don't have perfect control of inflation. we'll try to return inflation to 2% at a pace which takes into account the situation with respect to unemployment. the risk of higher inflation, you say 2.5%, well, 2.5%

expected change might involve a distribution of outcome, some of which might be much higher than 2.5%. and the concern we have is that if inflation were to run well above 2% for protracted period, that the credibility and the well-anchored inflation expectations which are such a valuable asset at the federal reserve, might become eroded. in which case we would in fact have less rather than more flexibility to use accommodative monetary policy to achieve our employment goals. i would cite to you just as an example, if you look at vice chair yellen's paper, which she gave -- or speech which she gave a couple weeks ago where she described a number of ways of looking at the late 2014 guidance, she showed there some so-called optimal policy rules that come from trying to get the best possible outcomes from our

quantitative economic models. what you see if you look at that is the best possible outcomes assuming perfect certainty, assuming perfect foresight, very unrealistic assumptions, still involve inflation staying quite close to 2%. so there's no presumption even in our econometric models that you need inflation well-above target in order to make progress on unemployment. >> try to make a living out of parsing these statements noted in the section on strange and global financial markets the committee said this time around strange and global financial markets continue to pose significant downside risks to the economic outlook. but in january the committee said that the strains were easing. what are we to read into this apparent change? are strants tightening now? what is your assessment of the situation in europe with the

debt crisis authorities there are adequately addressing that crisis. >> supposed to be a factual description of what's happening in the environment. in january the financial markets had calmed considerably reflecting a number of steps taken in europe including notably the two large long-term refinancing operations by the european central bank, which helped finance europe's banks for up to three years. in recent weeks we've seen more market stress arising from concerns about the fiscal positions of spain and italy. and, you know, we've seen more volatility in our own markets related to that. so we're simply taking note of the fact that a portion of the improvement that we saw late last year and early this year in european financial markets and in our own financial markets has been reversed recently. nothing more intended than that. as you know, i had the opportunity over the weekend to speak with many of my european and other international

colleagues because we had the g-20 and the imf meetings here in washington. so i had plenty of opportunities to discuss the european situation. i think it's true that the europeans have made substantial progress overall. i include not only the two ltro operations, but also the greek debt deal, the work on the fiscal compact. and recently the setting up of a larger financial firewall that can be used to avoid contagion should another country face serious financial distress. so progress has been made. but obviously judging by market conditions, there's still more work to be done. and we are counting on our european colleagues to continue to follow through their commitments and to put very strong effort into addressing the main significant problems and concerns in europe.

>> robin harding from "financial times." two questions. follow-up on steve's point about the interest rate forecast earlier. are there any forecast rates still be close to zero at the end of 2014. given that you said the committee isn't entirely happy with the language in that statement, what information can we then take from the forecasts when they change like that? the second point f you were to decide to do more for the economy at some point, could you run us through the set of feasible options to do that? >> sure. if you compare this set of forecasts with january, you'll see that a few members have pulled in their expected date. but let me just reiterate that once again that these are just inputs into a decision process.

they represent individual estimates. and quite admittedly as many of the participants said around the table, these are uncertain from an individual point of view. and as we discussed the range of consideration including the fact that we remain uncertain about how the economy's going to evolve, i've talked about for example the so-called oakins law puzzle whether europe will quickly fall or begin to level out. given those uncertainties, given the risks like the european situation or the fiscal cliff that we've just discussed here, that there was a quite reasonable case for maintaining the guidance late 2014. said, there was a great deal of comfort among the participants and the committee members with maintaining this

guidance. >> thank you. marketwatch.com. judging from some of the views from fed officials, it looks too big to fail this is the next step where the attention should be paid and work should be done. there's even proposal to have legislation to force bank dev devesttures. could you talk about your views on these things? >> yes. i believe too big to fail was an important cause, at least a propagating mechanism of the financial crisis. and i believe it's absolutely incumbent upon us to do all we can to eliminate too big to fail. what i mean by that is a situation where a failing firm is bailed out because its collapse would have such adverse circumstances -- consequences for the rest of the financial system. so we are working to get rid of too big to fail. i think we're making some progress.

first of all, we are very substantially increasing the supervisory and regulatory oversight of large financial institutions. that includes, for example, the b basel iii, more liquidity requirements, stress tests, a range of tougher supervisory requirements that many are embedded in the rule we put out on 167-166 that section of the dodd frank act. so, the first thing we're going to do is make sure that these large institutions are stronger, that it's much harder for them to fail and that they are watched much more carefully and actively by supervisors. the other part of eliminating too big to fail is that in that circumstance where a large complex financial firm does come to the brink of failure that it must be allowed to fail. it must be safe to fail. and in that respect, one of the

principle tools that we've gotten from dodd frank is a so-called orderly liquidation authority, which is the fdic's tool and the federal reserve is working closely with the fdic there. the idea is to apply the same kind of bank resolution tools that the fdic's used for many years on domestic banks to large complex financial firms. obviously the complexity and international aspects of these firms makes it a much more challenging task. but i think we're making progress there. we have put out rules about so-called living wills, which will require large financial firms to essentially plan out how they would be disassembled. and we've continued to talk with international colleagues about how we would cooperate if a multinational firm had to be put into receivership. and indeed part of the reason that there's been some downgrade or potential downgrade for some

u.s. financial institutions is the judgment of the ratings agencies that the so-called impolice it government support that these institutions have is less than in the past. i think ultimately what we'll need to have is a situation where large firms are both making judgments about their size and complexity based only on the economic benefits and costs and not on too big to fail considerations and that if there is failure that it can be done and achieved without highly adverse consequences for the financial system and the economy. that's our objective. and that's the way i think to end too big to fail. >> you've been working hard to improve communications with both markets and the general public. what's your assessment of how benefits are done? >> well, i think that's part of

the -- your job to say. i think we're making progress. i think it was an important step to make clear what our inflation objective is. i thought that was important. and we put out a statement that described the overall policy approach of the federal reserve. we've taken a number of steps to improve communication including these press conferences, of course. but also by expanding our projections. and by continued, you know, work doing -- sorry, doing testimonies and speeches and most recently as you know i did some classes. i taught some classes at a local university. so we're doing our best both to achieve really two objectives. one is to help make the fed a little more understandable to the average person because many people don't understand all the

arcane aspects of the federal reserve and monetary policy. and to be good voters and good citizens, they need to understand something about what the fed does. and also to communicate with markets so that markets can better appreciate, you know, what our monetary policy plans are in order so that interest rates and other asset prices can appropriately reflect those plans. i think the evidence on the latter point is that there is better understanding of the fed's policies. and, you know, we've seen for example less volatility in interest rates related to greater certainty about what the fed is likely to do. but i want to emphasize that this is an ongoing task, it's a work in progress, and we're going to continue to look for ways to make ourselves better understandable and more transparent to the public.

>> assume you were not constrained by the zero nominal bound right now, what would the fed rate be, even if it were negative, and do you believe you're at the equivalent using unconventional tools. and could you put numbers on the exceptionally low federal funds rate, for example, what a 1% federal low rate qualifies exceptionally low at the end of 2014. >> well, the exact reading for the federal funds rate today in the absence of zero bound would depend on what particular rule or model you use. i don't want to cite a particular number. but it probably would be negative. and in that respect, we are trying to compensate for that by the use of nonstandard tools including, as you know, almost a $3 trillion balance sheet. we see monetary policy as being approximately in the right place

at this point based on the analysis that we've been doing of the economy and the outlook. that doesn't mean we might not take further action. we are certainly prepared to take further action. but for the time being, it appears that we are more or less in the right place. exceptionally low. one of the reasons the language in the statement is vaguer than you would like is because we're trying to get a consensus among 17 or at least ten people. and different members or participants in the fomc might have different views of what exceptionally low means. personally, i think it's close to somewhere where we are now. >> chairman, "american banker." to follow-up on the too big to fail discussion. there's been acute discussion in recent months calling for

bridging at the banks even louder than before including some fed officials. you just talked about the need to eliminate too big to fail. of course, dodd frank, that's the intent of it. my my question is two-fold. do you agree and is there an argument to be made for breaking up the banks and is that something that the fed should consider when weighing financial stability and to this earlier point that you made, what, in your view, is a litmus test that will allow us to know that we can achieve too big to fail through dodd-frank. >> where, there could be a situation where an institution is artificially large and i suppose that considering breaking it up would be something that regulators should look at. in my own view, though, a more market responsive way to address

this problem is to eliminate the incentive to be too big to fail. that is, to -- through tougher supervisory oversight, through higher capital requirements, through restrictions on interconnectiveness, et cetera, take away the benefits or force firms to internalize the complex. and as i was saying earlier, if we can safely unwind a failing firm, then we no longer have too big too fail. that's a very, very important objective. the test would be that the financial markets that lend to large firms base their bond spreads and what they are willing to pay for the stock of

those firms and not on the fact and i think the market indicator will help us see towards ending too big to fail. >> mr. chairman, good to see you. there's been some concern in markets about what will happen to bond yields at the expiration of operation twist on june 30th and some speculation on what the fed might do, might need to do, to keep downward pressure on yields. is that a concern that you share and do you and your colleagues feel the need not to disappoint these kinds of market expectations?

>> well, to your last point, the purpose of monetary policy is to achieve our objectives of maximum stability. it's not to disappoint or not to disappoint investors. so we will take actions based on those economic objectives and not on trying to achieve certain market outcomes. there is some disagreement, i think, about exactly how balance sheet actions by the federal reserve affect treasury yields or other asset prices. the view that we have generally taken with the fed, and which i think the evidence is pretty good, is that it's the quantity of securities held by the fed at a given time rather than the new purchases, the flow of new purchases, which is the primary determinate of interest rates. and if that theory is correct, then at such time as our purchases come to an end, there should be relatively minimal

effects on interest rates at that time. and that, in fact, has been generally our experience and we will monitor the situation and if we decide that conditionses are consistent with our objectives, we will act to fix that. but, again, our expectation is that at whatever point that the financial markets being quite forward looking will have anticipated that and the effects ought to be moderate. >> my question is for your

comment about the u.s. now are you confident that the u.s. economy would avoid long-term termination like we had in japan and if it's the case, only positive response make a difference of japan and u.s. or will any other factor make a difference? >> last part again? >> policies that make a difference and the backup japanese experience and i think it's very important stha we acted aggressively and pre-emptivelies to avoid japan had a much bigger bubble and shock when the bubble collapsed.

these circumstances are certainly understand blg. but, again, we did avoid deflation. the other thing which i think we have done reasonably well here in the united states is we have moved fairly quickly to make sure that our banks were recapitalized and we're recognizing bad assets and i think the stress test that we conducted last month are good evidence that the u.s. is considerably stronger and, indeed, much more resilient than it was a couple years ago. so those two things are positives and would tend to suggest that we would avoid some of the problems that japan has faced. that being said, i think it's always better to be humble than just to avoid too confident to

maintain a strong monetary policy support and return to a more normal situation. >> scott with cnn money, sir. i wanted to ask you about the labor force participation rate. it took the lowest level since the early '80s. can you talk about why people are dropping out of the job market, whether it's a permanent structural problem? and what convinces you that things may change? and if i can pop a different question, your colleague, sheila bair, about her concern over being in a bond bubble. she said you should declare victory and you should do something about puncturing that bubble before it gets too out of

control. can you respond to that, too? >> i'm declaring victory, i think it's still a little too premature to declare victory. i think keeping interest rates low is still appropriate for our economy. as for the bond bubble, interest rates are low for a lot of reasons, including monetary policy, of course, but also include a weak economy, low inflation expectations, and safe haven demands. of course, interest rates will arise at some point. we hope that they do because that would be an indication that the economy is strengthening and i think it's important for holders of long-term securities to manage their risks and pay attention to that. but all of that being said, again, there are both good reasons to continue monetary ease and interest rates to be low. the first part of your question

was -- oh, participation. actually, we had a very good discussion of that at the meeting because it is an important issue, trying to assess how much of the change in the employment is structural, how much is cyclical and so on. there is, in fact, a downward trend in labor participation in the united states. it comes from first the fact that we are no longer getting increased participation from women. secondly, because as society ages and also for other reasons, male participation has been declining over time. so there is a downward trend that we have to take into account. the participants at the meeting, at least a