tv Inside Story Al Jazeera December 18, 2013 5:00pm-5:31pm EST
>> this is al jazeera america live in new york city. i'm tony harris with a look not, libby out, 64-36, and the senate a very judicious body even though 64 does not seem like a huge number it exceeded the margin that was needed. all the democrats voting yes, that was a victory for senator patty murray one of the two architects on this bill.
and we saw republicans vote along the democrats. nine is a bigger number than ag. >> 64-36, that's one of those super majorities, right, that. this now goes to the president for his signature. expect him to sign it before he leaves for hawai'i on friday. >> those are the headlines, i'm tony harris. "inside story" is next on al jazeera america. >> an ease or not to ease. what that means for the economy in 2014. decoding the just concluded federal reserve meeting is the inside story. ray suarez.
what the federal reserve decides has a direct impact on the economy, and your pocketbook and effects felt around the world. since the great recession the federal reserve has taken interest rates to historic lows and used its power to stimulate the economy using quantitative easing. ben bernanke announced the feds will scale back the program next year. we'll decode the fed's actions, look ahead to the tenure of incoming fed chairman janet yellen and look at the recovering economy.
the federal reserve wrapped up two days of policy meetings and concluded the u.s. economy is strong enough to start tapering the banks investment program known as qualitative easing. >> starting in january we'll purchasscale back purchases. >> reporter: the positive signs are few but strong. unemployment reached 7% in november. the s&p 500 gained 25% just in the past year. the highest in a decade. and congress passed a budget for the first time in four years. >> today's policy actions reflect the committee's assessment that the economy continues to make progress, but it has much farther to travel before conditions can be judged normal. notebly despite fiscal head winds the economy has been expanding and we expect growth in the coming quarters.
>> reporter: all this good economic news could mean its time for the federal reserve to ease it's massive monetary stimulus program. quantitative easing is the fed's monthly $80 billion bond buying program determined to keep interest rates low to allow the economy to steadily improve. the majority of the bond purchase in qe went to u.s. banks. this with the expectation that those banks would sell government bonds and mortgage back securities. however, banks have been holding on to that money and not investing it back into the economy. it was expected that the bond buying would increase inflation, but it was throughish. the trillion dollar investment on the part of the feds has not
spurred the economy. >> i want to thank you for your outstanding service. >> reporter: ben bernanke is due to stepped down at the and of january having served through eight years during one of the hardest economic times in history. >> obama: would who will succeed him is one of the most important appointments that i'll make as president. because the chair of the fed is one of most important policymakers in the world. the next chair will help guide our economy after i've left office. >> reporter: benber any keys replacement, janet yellen is waiting for congress approval. she'll focus more on unemployment than inflation. >> here with me to discuss the federal reserves decision to taper, mark, the director of financial regulation studies at the cato institute, and kay toe
la costa, and nela richardson, senior economist with bloomberg. well, with $85 billion a month to $75 billion. $10 billion is by anybody's measure still a lot of money. is this a big deal, nela richardson? >> it is a big deal because they pushed a button. it's a start. it's a start that signals two things. one, that we're going to have low interest rates for a very long time as part of the federal reserve guidance. and secondly the feds think the economy is improving. that's significant after years of being sluggish, after years of treading water we might see some growth next year. that's a big deal, and that's what gets markets excited. that i think is why you saw such a strong positive explosive market reaction to this taper decision. >> well mark, what happens when
$10 billion comes in relybly month after month. is there going to be a difference. >> instead of buying $85 billion a month, they're not going to be buying $75 billion, but we don't know what is going to happen on the supply side. is the government going to issue as many treasuries? is fanny and freddy going to issue as much debt. if that reduces, then you won't see an impact. you will see a small impact on rates. and basis points are 100th of a point. so in the cost of mortgage or in across the economy. it will be noticeable to emphasize something that nela said. it's less the size than a signal in the change of confidence in
the economy. >> at the beginning critics of the policy said this is terrible because this is the worse abuse of fiat money. money that you talk into being, but then it didn't get lent out. it didn't go out flooding the economy. it got held in closets somewhere. if it's not being issued. it's not written into being, will it make a difference? >> the question is will it make a difference on the positive side or the critic side. critics said it would lead to run away inflation. but that has not been the fact. and it gave a little bit of pause about today's decision. but in terms of what mark is saying, what the effect will be and where is it going to go? the fed has been adding stimulus
to the economy ever since the crisis started. this is the first time they have taken a step back from adding stimulus. that's a significant event. whether or not the $10 million will make a difference, that's a testament of the feds a communicating their own feelings. when ben bernanke was first broached about the idea, there was a freak out in the markets. he came out and said, this does not mean that we're going to raise rates. this is a separate issues. >> ray, just to distinguish, there is essentially two things that have been happening with the money that goes to the banking system. one is the easier in that reserves have increased and banks have been sitting on a lot of cash. $1.5 trillion and $1.7 trillion.
and interesting enough even though the federal reserve has been buying treasury securities the banks themselves have been buying treasury securities. if you were to show a graft, it has been offset by bank lending to government and to the mortgage market. i think its better to look at what the fed has done as saying there are certain sectors of our economy, the mortgage sector, where we're going to channel our liquidity to that direction. there are institutional reasons about our banking system, why most of this has ended up in the mortgage market rather than in other places in our economy. >> well, nela, this was supposed to be stimulative, all during qe 1 and qe 2. but the narrative is that the economy is bumping along, steady, slow, and unspectacular growth. how can you put 1 trillion-dollar into play and
get that kind of result? >> it's not an accident that this policy targeted housing. because housing, the housing sector is responsible really for pulling the economy forward during and after the recession. it's the first--it's so interest rate sensitive it's the first market to go down in a crisis, and it's the first market to pick back up. unfortunately, we did not see that. there are probably a lot of reasons why, and i think probably the most fundamental is the change in culture of what the house meant, who should have a house, and on the part of the banks, a resistence, reluctance to put that risk back in the market because they were the major losers from the subprime crisis. this policy tool that is supposed to pick up housing didn't do its job as effectively as it had in previous recessions. and for that reason alone you see some kind of stunting in the potential of growth going forward. now there are other reasons, one
of them being congress, and we can talk about that as well, but in terms of what the policies was supposed to do, housing was not the transition mechanism that it had been in the past. >> when we come back, i want to hear from you, pedro, what the continuing of the taper is going to mean to the economy. stay with us, you're watching "inside story."
high monitor policy remains appropriate. >> welcome back to "inside story." i'm ray suarez. that's outgoing federal reserve chairman ben bernanke. he's talking about unemployment, inflation, and monitory policy. he mentioned today that he set transparency as an important priority for the time that he served as fed chair. when he talks like that is the public meant to follow it or really is he talking in technical terms to an audience of journalists and others who understand the technical talk? >> i think he's doing the best to straddle both worlds. his first attempt to be colloquial than his "60 minutes" interview that he did. he has done a great job, especially when you consider where the fed is coming from. his predecessor alan greenspan
led in policy by discretion. we're doing this because we think its best and we're not going to tell you the reasoning behind it, bernanke has gone out of his way to use explanations to the public. he uses terminology that may not be your average person's vernacular, but he has increased the amount of transparency. >> and in this case what does that mean? >> very low interest rates for a very long time. his message is that the fed is going to remain supportive of the economy regardless of this small retreat from the bond buying stimulus that it undertook today. >> so it's not a signal that it's going to be reduced another $10 billion a month after that. >> he suggested that it might happen but it's not necessarily the case. >> he emphasized that it's very dependent on the data, and as yellen and the rest of the
committee will see it going forward. as we start to see job growth, they don't just look at the unemployment rate. is it because o people are movig or leaving the labor force, but it's also data dependent, and they're telling us that it is fair to assume that for the next year or two it will be on the fairly easy side. i don't think that's going to change. >> we get new unemployment numbers every month. we get gdp numbers once a quarter. how often does the fed revisit decisions like this one. >> revisit-- >> i mean whether they're on the right track. >> they're constantly revisiti revisiting. alan greenspan would use really technical data and obscure data to make decisions. i don't think ben bernanke does the same
thing but there are a lot of economists scouring data as we speak looking for news and about what direction the economy is going. and i think along with some guidance on interest rates ben bernanke gave us a forecast, and it was optimistic. is the economy going to be as strong in 2014 as was laid out today? >> could he be seeing things that you can't yet see? >> i'm sure he sees all kinds of things. i hope that the things that he's sighing are predictive of what happens that we know sometimes the fed gets it wrong. >> and defensive and overly optimistic. they've been wrong almost every time. every year for the last three years they've predicted higher.
>> now can we take a quick walk across the panel and see this it did what it was supposed to do. >> it depends on what you think it should have done. it lower interest rates and mortgage rates and 10 to 20 basis points. we're still down 2 million construction jobs from where we were at the peak. it has certainly made a difference, but on the other hand it's added fuel in the stock market and pushed up housing more than it would have been otherwise. i think the cost outweigh the benefits but it's there. >> i'm with mark. it's helped the economy tread water but not swim. we're really getting out of second gear to see the ref up of the economy. we've seen it in housing but not
in jobs. >> pedro? >> i think people who doubted efficacy of qe, so many hurdles that were basically, you know, we were going to get lucky to get through the year without a recession. and while it didn't get us to the growth we wanted to see with did get us off the fiscal drag that we thought we were going to see. so in that sense it has helped. whether the unintended consequences down the line could be damaging, that's certainly true, but one of the costs that people want to traumatic about are the costs are asset if you believe the monitory policy works, the cost of not taking it a long-term unemployment problem that we'll have to deal with for several years. there is no easy answer for them. >> just a quick break and when we return we'll talk about the future for the fed under its expected new chair janet yellen.
we've talking about the federal reserve and it's role in the economy recovery. we have mark and pedro, and ne nela, janet yellen, i had to hedge my bets at the end of the last segment there. she has not been confirmed sworn yet but by all accounts she's on her way in. said to be much more hawkish on getting the unemployment rate down than worrying about inflation, which as you've all mentioned has not been much of a problem lately. what does that mean in practical terms while the bank is unwinding this long-term stimulus project. >> i think since inflation has been so contained it means that she has the freedom to target unemployment as aggressively if she chooses as bernanke has in the past. she really can be data driven and deliberate but look at a
certain set of indicators that is targeted at unemployment. being motivated by those rather than worrying about the protecter ointerestrates. there is head wayne that may go forward, reverses, stops, the market may be queasy trying to figure out what the latest number means, we can expect to say that. >> mark, with the new chair will there be new tools at her disposal. >> she certainly could change course. you could pro long. i think a lot of this will actually be when does the further tapering take place? so some of this is about timing as much as anything else. i think she'll keep her foot on
the gas longer than bernanke would, and it's important to keep in mind it's a committee. she's not a dictator. it will be a committee and where she moves that committee is an interesting question, too. we don't know much about her management skills, her team leading skills, there are a lot of tools at her disposal, i'm skeptical about how effective those tools are, but there is a lot that she can try to do, and i think she will. >> is there anything, pedro, that she revealed in her confirmation hearing that gives you signals about 2014? >> you get the sense that she wants relevant policy co don't knewty. i think it's interesting the
that it's permeated the entire federal reserve. the fed is reaching 14 trillion-dollar, and they don't seem to want to take the financial sheet further. you get the sense that they want to move back to a world that they know how to operate, and that's the world of interest rates, that's basically to make promises about the future in order to keep rates low for even longer. so by saying we expect--right now they have a promise, they'll keep interest rates near zero and long after it falls 6.5%. they're going to stay that way for a long time. >> for all of the 21st century inflation has been sort of the long awaited guests that have not shown up to the party whether you're talking about the
greenspan time for the bernanke time it's always been talked off in a fearful way but never really quite gotten here. >> it depends on what you're looking at. we've seen house prices go up. we've seen commodity prices fluctuate widely over the last couple of years. the discussion around inflation often focus on core cpi, throws aside food, throws aside housing and those are components that tend to be volatile. but again we are backing out the housing, the so i would say i think that there are limitations to what you get looking at either core or cpi and you have to look at the asset impact of this. my concerns again there are pluses and minuses, costs and benefits to any of these policies. to me the big cost is are we inflating another asset public. what is happening with the housing market.
janet yellen was part of the reserve, which included arizona and nevada and she was there when the housing bubble was blowing up and you didn't hear her raise a lot of flags from her during that time. so i worry is she going to miss the next bubble? >> what do you have to watch to know if that's happening or not? >> this whole year there has been a huge disconnect between wall street and main street, and you see that perfectly as the stock market is up about 20% this year, and so main street suffers. and in testimony yellen was pretty reserved about the idea that there could be even a bubble or even froth in the market. i would keep looking for this disconnect. does wall street and main street stay on the same page? it used to be when a good jobs number came out wall street tank because the stimulus would not
be there. we want to see con grew wednesday in our two sides of the economy street, and that way we can be insured that there won't be this bubbly behavior in the economy mark, pedro, nela thank you. the program is over but the conversation continues. for more on this conversation or any other show you can log on to our facebook page or reach directly @ray suarez news. in washington, i'm ray suarez.