not be warranted by the circumstances of the day. the probability that the economy is close to turning his different than it was a few months ago. growth will likely be bought -- positive in the second half. we will decide when the boldness tense. over time as the economy moves to sustainable growth, the fed will return to its traditional policies of setting the funding rate and will reduce the balance sheet in an orderly way. how will they do this, partly on their own. many of the liquidity programs provide short-term loans. these will mature quickly, and the balance sheet will be shrinking.

this is designed to be unattractive during normal times, and most attractive to the people who need them during unusual times. as the ceased to be useful, they will no longer be used. some programs are being used less. and we will see this continue. a significant portion of the balance sheet may not be shrinking at the important rate -- and we need tools to be used solely monetary policy can be free calibrated. we can be as creative on the way out as we were on the way in. we can be creative with liabilities the way that we have been with the assets. these can be sold out right, or least through a repurchase transaction. another tool is the payment of

interest by the federal reserve. without interest on reserves, the rates are raised only by restraining the quantity of what is available in the market. reaching the target may lead to a sharper reduction in the balance sheet. we can raise the interest that is paid in tandem with the target and this will raise the opportunity cost of the banks that are lending. as we announced in march, we are looking for additional tools for legislative action. an example would be the authority to release debt, and expansion of the treasury supplemental plan. now what circumstances will require us to use the tools that we have, and what we may have in the future?

one clear concern is price stability. the balance sheets grew in a matter of weeks and remains large. there is a precedence for a large increase in the balance sheets. this is subsequently associated with inflation. i want to emphasize part of this, inflationary pressures are likely to rise without broad expansion. this explains why there is concern, and why we look after the ability to reverse the growth of the balance sheet. forecasting inflation is never easy, but this comes with the job. public interest leads to many different independent use. but these are particularly

difficult times, for the forecasting. all that you have to do is look at the lack of consensus. the spread between the lowest and highest inflation forecast reported is more than twice what it was one year ago for inflation in 2009. two forces could explain these differences of opinion. a high unemployment rate and a low rate of capacity utilization, this puts pressure on costs and lower inflation. some models show possible deflation, but this has not fallen to the extent we may have been afraid of and there is another factor in play. consumers and business expectations.

expectations have remained relatively stable. this is a surprise, given the severity of the downturn. but as economic conditions improve, consumers and businesses may expect a change in inflation. once this is solidified, this becomes part of many economic decisions and makes inflation harder to change. with the inflation near 2%, this is at a level that would be acceptable under normal circumstances. but these strong forces are working in opposite directions and the fed must be able to respond. in conclusion, these have been challenging times and the fed has met the challenge with innovative programs that depart from the traditional policy, this is robust to the variety of the risks that we face.

this should not obscure the fact that the means are many by the end is unchanged. traditional and non-traditional policies are aimed at supporting sustainable growth, and making certain of price stability. as the economic conditions improve and we lay the groundwork for reducing the balance sheet, this will remain in our mind. thank you very much. [applause] >> i failed to remind everyone, that you can write your questions down do you have the cards? we are collecting this now. i wanted to start with a couple of questions. you expect to see unemployment continuing to rise until 2010, which is a consensus forecast. how high do you expect

unemployment to rise? >> most recently, as projected by the central forecast, we believe that the unemployment rate was likely to rise to about 9.5%, and in 2010 this would be at the height. things have transpired since then, better than i had expected. in terms of the financial markets and credits. but the unemployment rate -- this rose to 944%. we're almost there. there is a chance that the unemployment rate will go higher than i thought it would. there is a possibility this would be going up earlier.

i can envision this going up by the end of the year and then coming down. we see positive growth rates in the second half of the year, and the growth will be sustained. the behavior between the beginning of growth, and the fact that job loss continues is a source of concern, this is what we were dealing with in 2003 and 2004. in terms of the regional economy, the five state region that i have, the state of michigan, they are front and center with all of the

difficult circumstances, chicago is tracking the nation very well. >> you talked about the economy turning positive, many forecasters believe this. the idea of the jobless recovery, many people say the declines are so great, there is the opportunity that the losses in employment -- this may come back. i wanted to know your perspective on this, and what are the chances of this coming back quicker than expected? what do you think the probability of this is, in the credit system's? >> we are experiencing recessions of 74 and 75, this was deeper than the more recent recessions.

we are experiencing this, hopefully you can experience the rebounds that came more quickly after these recessions. this will depend on how businesses feel about how things are going. the businesses have been more focused on keeping the inventories in line, and they have cut back during the recession. they did not have the excess inventory. this would be better for growth and employment, when you find out you need additional labor, this is the question that the businesses will have to come to grips with. given the amount of uncertainty that we are facing, i would

expect a new middling half. >> many people ask me this, what are the driving forces to get the economy out of the recession. the recovery is a little bit of an issue. >> it is easy to think of reasons that the economy is facing challenges. one thing is the positive side of the inventory cycle. the businesses have cut this to a lean level. we will get a positive boost for the cyclical reasons. hopefully this will jump-start a better level of confidence and the businesses will start thinking about the capital

expenditures, and if they have adequate access to the is reasonable to them, they will think about the shortchanging vintage, and if you have to go through the recession, hopefully you should benefit from what is coming out of that, there are a number of innovators who can take advantage of these opportunities. the world economy -- is experiencing more than what we have experienced, this is unlikely to be the engine of future growth as well. >> exports are falling less than imports? this is not exactly positive. >> this will continue to be a source of uncertainty for businesses as they tried to position themselves.

>> there are a lot of questions on inflation, i will say something that -- i will talk about something that you said, the disinflationary pressures are weaker than the fed was afraid of, does this mean that we need to worry about inflation sooner? and the question that is coming up, what are the indicators you are using for inflation. are you confident -- we think the model that you are using is affected to forecast inflation? i am asking you on this. >> there has been a lot of recent research to uncover the things that we knew before we went into this. inflation is difficult to forecast.

the inflation movement is not especially good. this is a very large difficulty for all of us. with the economic contraction, we were expecting to see, a large gap in the resources that would put down the prices, we have not been hit -- not been experiencing the upward pressure. this was after the rise in commodity prices. how much of that did we pass through? and the fact that the workers are laid off, these pressures are minimal. resources will be abundant and able to be employed. it is difficult to see the inflationary pressures set off by these circumstances.

we expect the price to be lower. how much would you have expected this with the unemployment rate forecast heading up 10%. this is a very large number relative to be sustainable level of employment. this is involving the hon utilize resources. i would have expected inflation to come down a little bit more. you can put together the models that will follow the forecast for inflation. the inflation has not come down as quickly, it takes time to respond and we are still concerned that these forces are out there. the other part of the equation is the inflation expectations. if the public, in setting their

expectations, if this is a little bit higher, this will offset the small amount. we are looking for indications that either of the factors are differently -- are operating differently. we are thinking about the resources, and we are looking at all the measures that provide the indication of inflationary expectations. the michigan survey and, those move around. the inertia in terms of the inflation forecast, have not behaved in a way that made us concerned. we're always looking at the data and this is a big change, to go through the liquidity issues, because this change is a lot in those markets.

>> this brings it back to the industrial midwest, one of the arguments comes for bailing out the industry -- this is for the suppliers because there was the concern that this would undermine the manufacturing sector. along with the automobile sector, the remains of ford motor co. and toyota. and there is the evidence that the supply chain, this went chapter 11 during the course of the credit problems in the fall that could cause a stumbling block, with possible inflationary pressures. what do you say about the reality of that, was this the bailout with what everything -- with everything that was going on. i was wondering what you thought happened to the supply chain. one issue of the major 1980's

was a major destruction of the distortions. >> it is unclear what the effect of the current policies have been. this is a real challenge to go through the financing issues, the issues facing the industry, of the supplier network. what is used by each of the companies, in the chain. and the feeling from years before, that the chain was a bit larger, this was needed for the sales in the production base. going through what needed to take place in the absence of this, on top of the financing difficulties. this will be smaller. throughout the entire time of distress, we have been thinking about the spillover effect,

where the state and local governments are impacted not through the fault of their own, but because of financing that puts them at unnecessary risk, to the extent of something -- that something more orderly could be engineered, through a transition period this has been the goal. >> this goes back to the national forum. bernanke made a statement about fiscal discipline. and the role that the deficits may play in the future in terms of inflation. a warning shot to congress to thing beyond the current recession. there are many questions about how badly the current deficit problems could influence the inflation pressure, how much

will they complicate the job at the federal reserve, and what will be the interaction. what will be the issue of monitoring against fiscal stimulus? this is not just your strategy, but the fiscal strategy as well. >> this is a difficult time for everybody. personally, i thought the last election, whoever was the winner, they would have to deal with the fiscal issues facing the country and the taxpayers coming down the line with changing demographics, the baby boomers retiring. >> we have eliminated the retirement options.

>> we have those issues and on top of that we have the largest recession, greater than 1974 and 1975, we were very concerned about inflationary forces and the financial stress that came with everything. i thought this was appropriate to provide as much stimulus as we could. we did that on monetary policy, a tremendous number of innovative programs that have taken us to the boundary of the authority, this was uncomfortable but this was the -- this seemed like the right thing to do. we walked into the opening of those issues, from the good of but -- for the good of putting the economy in the best place for these circumstances. we cannot talk -- we can talk

about the elements of these programs, we agree with everything but the size of the programs. and this is adding to all of the challenges. the challenges remain and they need to be dealt with. we have to make choices about the level of spending and how will this be funded, and position ourselves going forward, from a monetary policy standpoint. we face challenges but we have a responsibility to provide financial s -- financial conditions with sustainable growth. this is what we will pay attention to, in conjunction with everything else that was going on. this is not the time when you can demonstrate to everyone, that the price stability will be maintained and sustainable growth will be provided for.

we will do the best job that we can. >> during the 1990's, and the later part of the 1980's, he played a role that was much more political, arguing that the means justified the bonds, and the need was to get fiscal discipline, with the 1990 budget and the clinton administration, convincing and talking with them about fiscal discipline, to embrace a version of pay go. it is interesting to think about bernanke, -- i actually watched

the testimony of congress, and this was not the great depression which was a problem. the fed supported this in the beginning of the crisis. but now they are calling on congress to think about this longer-term. does this put the fed in the position of being more outspoken about the economic functions of washington, with the people who have to pick up the pieces at the other end? >> this is central to the mission of the federal reserve. we have to look at the government's spending and how this position -- how this is positioned for the pathway of sustainable growth.

it is the standard fare to talk about the effect of the fiscal programming, so that we understand whether or not more accommodations or less accommodations will be put in place, this is normal. you are talking about over and above -- these kinds of issues. these are not the issues i am embarking on. but the chairman of the federal reserve is a very important responsibility, and congress last the opinion of the chairman, on a number of issues. >> i will ask one last question. >> it seems that i should not answer. >> this is an important question.

you can probably answer this in and lightning way. what are the indicators that he will be watching that will signal that this is the time to begin the exit process. and how far into this process do you have to be to raise interest rates? can this happen at the same time? >> this is a difficult question, because the fighting the process is so complicated. we have a series of programs expanding the balance sheet, there is a number that we did not pay attention to every moment, this was about $800 billion. we have representations' under the right circumstances, this would increase up three trillion dollars. along the way, as the balance

sheet is increasing, even when this was positive, we had trouble with the amount of reserves in the system. by expanding the balance sheet, we were making choices on the interest-rate policy, we were not able to offset this. this was once you got down to this level. in order to get to the place where the economy is going quite well, and real interest rates are high, the borrowing to businesses are higher and the funding rate should be positive, because of that we will have out -- we will have addressed the size of the balance sheet, and that is why -- we can sell the assets or do

repossessions on them, or have the reserves. we would be naturally working to get the balance sheets down so we can respond to the economy the way that this is working. what this is that will finally get us to a time when interest rates are rising, this will be many sorts of things. unemployment will be coming down, the economy should be growing robustly, -- more will be coming. we have to go back and look at that, the structure is changing and, this may be a little bit lower for some time. it is hard to choose a particular indicator, but we will have to deal with the inflationary pressures, some good luck would be nice.

the reserve is coming along at a place where they are consistent and not getting out of hand so we have to make hard choices. we will have to address this. >> thank you. we have had sunny days two days in a row. >> tonight is the annual radio and television correspondents dinner, and we will bring you live coverage, including the speech of president obama. >> house c-span funded? >> i have no clue. >> a government grant? >> donations? >> this is public money? >> my taxes? >> 30 years ago, the cable companies created c-span as a public service. no government funding, no no government funding, no government money