tv Inside Story Al Jazeera January 1, 2014 11:30am-12:01pm EST
>> thank you very much. thank you for watching al jazeera america. i'm del walters in new york. "inside story" is next. ♪ >> hello, i'm ray suarez. 2013 will be remembered as a year of partisan dysfunction in wash despite the threat of default and government shutdown the economy has been showing signs of life. unemployment dropped to its lowest level since president obama took office and since the great recession the federal
reserve has been using tools in its toolbox to keep the economy on track. interest rates are still at rock bottom, and the fed kept up its bond by bu buying program. that policy has been the signature of outgoing federal chairman ben bernanke. but the fed will begin to ease off the easing under new chair janet yellen. under this new edition, we'll examine the green shoots of a recovering economy. >> reporter: 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 quantitative easing. >> we'll be purchasing $75 billion a month reducing purchasing of treasuries by $5 million each. >> reporter: the positive signs
are few but strong. unemployment reached a five-year low of 7% in november. the southboun s&p 500, and congress passed a budget for the first time all year. >> the economy is continuing to make progress but it has much farther to travel before conditions with be judged normal. notebly, the economy has been expanding at a moderate pace as we expect growth to pick up helped by monetary policies and waning fiscal drag. >> reporter: all this good economic news could mean that it's time for the fertile reserve to ease it's massive monetary program. the bond buying program created to keep interest rates low allowing the economy to steadily
improve. the majority of the $85 billion a month bond purchase in qe went to u.s. banks. this with the expectation that those banks would sell government bonds and mortgage-backed securities. however, banks have been holding on to that money and not investing it back into the economy. it was expected the feds bond-buying program would increase the rate of inflation but it has been sluggish. it's a sign of the slow economic recovery. the 1 trillion-dollar investment on part of the feds since 2012 has not spurred the economy. >> i want to thank you for your outstanding service. >> reporter: ben bernanke is due to step down at the end of january having served eight years through one of the hardest economic times in u.s. history. >> the decision on who will succeed ben is one of the most important economic decisions i'll make as president, one of the most important appointments that any president could make
because chair of the medicine is one of the most important policymakers in the air and the next chair will guide the economy after i leave office. >> reporter: ben bernanke's replacement vice chair janet yellen has been waiting for senate approval. she has been described as more dubish than hawkish. she'll focus more on employment rather than inflation. here with me now in washington to discuss the federal reserves decision to taper mark, director of financial regulation at institute. pedro and nela , with bloomberg. $10 billion by anyone's measures is still a lot of money. is this a big deal, nella? >> it is a big deal because they
pushed a button, it's the start and it's a start that signals two things. one that we're going have low interest rates for a very long time as part of the federal reserve guidance. secondly the feds think that 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 marketed excited. i think that's why you saw such a strong positive explosive market reaction to this tapered decision. >> well, mark, what happens when $10 billion that's been coming in relybly month after month doesn't? will anybody notice the difference? >> it depends. it's a supply and demand. the fed have been big demand of fanny and fre fredie securities. is the government going to issue
as many treasuries? is fanny and freddie going to issue as much debt? that will impacts rates. all see a small impact on rates. a few basis points. it's a hundredth of a percentage point. we're talking about 10, 15, 25 basis points in the cost of a mortgage, borrowing in the economy. the most important part of this is less the real size as it is a signal about a change in direction and change in confidence in the economy. >> pedro in the beginning critics of the policy said this is terrible. this is the worse abuse of money, money that you talk into being. but then it didn't get lent out. it didn't go flooding into the economy.
it got held in closets somewhere if it's not being issued or written into being, will it make a difference? >> the question is will it make a difference on the positive side and the negative side. the critics are worried that the expansion would lead to run away inflation. that's hardly been the case. inflation if anything is trending lower and below the fed's target which has been a source of concern for the central bank and gave them a little bit of pause about today's decision. in terms of what mark was sayi saying, if the money is going to be there, and where is it going to go? they've been adding stimulus to the economy ever since the crisis started. this is the first time that they've taken a step back from adding stimulus. that's the significant of the even event. this is an attempt of the feds to communicate their message more clearly as market predicted. the rates may rise only a little
bit. as you remember in may and june when bernanke even broached the idea of tapering of bond purchases, there was a huge freak out in the market and the feds said don't worry, this doesn't mean that we're going to raise rates. this is meant as a supplemental booster to growth. >> just to distinguish, there are two things that have been happening in a broad sense. one is the easier in that increased and banks have a lot of cash. 1.5, $1.7 trillion. even though the banks continue to buy agencies and treasuries securities. if you were to graph small business lending, commercial lending on the banking side the amount it has decreased by is offset by the mortgage market.
i think its better to look at what the fed has done saying there are certain sectors in the economy where the fed has decided we're going to channel most of our liquidity in that direction. >> this was supposed to be stimulative, yet during qe 1 and qe 2 the narrative is wow the economy is bumping along, steady, slow, and unspectacular growth. how could you put 1 trillion-dollar into play and get that kind of result? >> it's not an accident that this policy targeted housing. because the housing sectors are responsible for pulling the economy forward during and after a recession. 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 is 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 kind of 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 tension 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 policy was supposed to do, housing just wasn't the transition mechanism that it had been in the past. >> when we come back, i want to hear from you, pedro of what the continuing of the taper is going to mean to the economy. stay with us.
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>> with unemployment still above it's normal run rate its estimated between 5.2 and 5.8% rate, and highly accommodattive 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 highly accommodative monitory policy. and even today he mentioned that he set transparency as an important priority for a the time that he served as fed chair. when he talks like that is the public meant to follow or is he talking in --
>> during the press conference it's difficult for him not to get technical because we ask him somewhat technical questions, but i think he has done a great job. his predecessor alan greenspan believed in policy by discretion, and it was sort of we're doing this because we think its best. we're not going to tell you the reasoning behind it, and ba bernanke has gone out of his way to discuss the policy. he has not use the average person's vernacular, i think he does his best to describe why the fed is doing what it's doi doing. >> in this case what does this mean? >> very low interest rates for a very long time. the fed is going to remain supportive of the economy regardless of this small retreat from the won't buying stimulus that it undertook today. >> it's not a signal that it's
going to be reduced another 10 $10 billion after that. >> he suggested that might happen but that's not been the case. >> it's very dependent on the data and we'll see it going forward. if we see significant declined in the unemployment rate, we look at john growth and they look at unemployment rate moving because people are moving or leaving the labor force. it's important to recognize that the fed does not look at one number. looks at five or six numbers in the market. and it's data dependent. for the next year or two it will be on the easy side. >> we get new unemployment numbers every month, nela. we get gdp numbers once a quarter. how often does the fed revisit decisions like this one? >> i think they're constantly revisiting. there are stories that alan greenspan would go into using
technical data and obscure data to make decisions. i don't think benbe bernanke does the se thing but there are economist who is are scouring data probably as we speak looking for news about what direction the economy is going, and i think along with some guidance on interest rates ben bernanke gave us a forecast on the economy that was new, ands have optimistic. this is where my doubt starts to creep in. is the economy going to be as strong in 2014 as was laid out today? >> could he be seeing things that you can't get to? >> i'm sure he sees all kinds of things that i don't see. i'm sure it's predictive of what actually happens. but we know, ray, sometimes the fed gets it wrong. >> and in nela's defense, they've been wrong every year in the last three years they forecasted growth around 3% and
it fell to the 2% region. >> now that it is at the beginning of the end of quantitative easing can we take a quick walk across the panel and see if on balance it worked, if it was good policy. >> it depends on what you think it should have done. i think it has low ered mortgage rates between 10 and 20 basis points. i don't think overall that's been enough to bring job growth. so certainly it's made a little bit of difference. on the other hand it's added fuel in the stock market. it's probably pushed up housing prices more than it otherwise. i think the costs outweigh the benefits but both are there. >> i'm right there with mark. i think it's helped the economy tread water but not swim. we're still waiting to get out
of that second gear and really starting to see a rev up of the economy. we haven't seen it yet. in housing but not in jobs pedro? >> i think it's interesting that people have doubted qe this year. we went in with a fiscal cliff, a sequester. we were going to be lucky if we got through the year without a recession. while it didn't get us to the growth that we wanted to see it did offset the fiscal drag that was significant this year. in that sense i think it has helped. whether the unintended consequences down the line would be damaging. that's possibly true. but one of the things that the fed has to keep in mind, one of the costs--the cost of undertaking more qe --if you believe the policy works the cost of not undertaking it is long-term unemployment program that we'll have to deal with for several years. there is no easy answer for them. >> just a quick break, when we
return we'll talk about the future of the fed under its expected new chair janet yellen. this is "inside story." many worry that the gains made in education will not stick in the future. aljazeera's jane ferguson takes us to a school in kandahar city that was long considered a success and is now facing closure. >> it's a place offering more than these girls know, a quality education in real tangible skills, a path away from positivity and early marriage and towards university and a career. since 2002, the modern stud has been teaching women
reserve, and it's role in the economic recovery. still with us, mark, director of financial regulations studies at the cato constitution. pedro who covers knicks in the central bank for the wall street journal, and nela richardson with bloomberg government. nela, janet yellen, i had to hedge my bets in the last segment there. she hasn't been confirmed, voted on, 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 . what does that mean in practical terms while the bank is also unwinding this long-term stimulus project? >> i think for the near term futureish it means that she has the freedom to really target unemployment as aggressively if she chooses as bernanke has in the past.
she really can be data driven, deliberate, but look at a certain set of indicators, motivated by those as opposed to worrying about the specker of rising inflation. >> one of the ways that traditionally has been done is by lowering interest rates. they're practically at zero, it's not that like you can do more than that. >> there is the head wayne as we've been talking before the break. what you may see is a policy that goes forward, reverses, stops. the market may be queasy from time to time trying to figure out what the latest number means from the medicine stimulus program. we can expect to see that. >> mark, will the new chair have many tools at our disposal . >> it could reverse course, and you certainly can pro long, so i think a lot of this will actually be about when does the further tapering tick place? some of this is about timing as much as anything else.
i think she'll keep her foot on the gas a lot longer than bernanke would, and a wrinkle is stanley fisher is advice chair is thought to be more hawkish than she is. it's a committee. you're not a dictator. you have to get the con centos of the economy, and where she'll be able to move the committee is an interesting thing it too. we don't know anything about her team leading skills, there are tools at her disposal. i'm skeptical at how effective those are. but she has them. >> what gives you signals about 2014? >> you get the sense that she wants relative policy continuity. bernanke, as pointed out, he has been a very strong advocate in the unemployment time, and i think she'll only go further in
that direction. the reluctance of continuing purchase is permeating throughout the federal reserve. those who want to attack the unemployment. they just don't want to seem to want to expand it further. you get the sense that they really want to move back to a world where they know how to operate in. and that's the world of interest rates. with interest rates at zero, is to make promises about the future in order to make rates low even longer. right now they have the promise we're going to keep interest rates near zero until i unemployment reaches 6.5%. and now they're say long after it reaches 6.5%. that's how they reassure the markets that they're going to stay that way for a long period of time. >> for all of 21st century the inflation has been the long
awaited guest that has never showed up at the party whether it's the greenspan time or the bernanke time it's always been talked off in a fearful way but never got here. >> it depends on what you're looking at. we've seen housing prices fluctuate. it throws aside food, energy and housing, and those components tend to be more volatile. >> yes exactly. >> we're backing out the housing, the imputed rank component of that. i would say that i think there are limitations of what you get with core or cpi and i think you have to look at the asset impact of this. to me my concerns, again, there are pluses and minuses to any of these policies. the big cost here are we
inflating the housing public. janet yel yellen, she was there essentially when the housing bubble was blowing up, and you really didn't hear a lot of concern, a lot of flags raised by her during that time. so i really worry is she going to miss the next bubble? >> what do you have to watch to know whether that is happening or not? >> i think this whole year there has been a disconnect between main street and wall street . the idea that there would be a bubble or froth in the market i'd start keep looking at this disconnect. is wall street and main street on the same page? does wall street celebrate a good jobs number. it used to be if a good jobs
number came out the wall street tanked because the punch bowl would be taken away. we want to see both sides of this economy, and we want to make sure that there isn't this bubbly behavior in the economy. >> we'll have to have you all back to check on how this forecast for 2014 plays out. thank you all. >> thank you so much. >> that brings us to the end of this edition of inside story. we want to hear about what you think about this or any day's show. you can log on to facebook page, twitter our handle is aj inside story am or reach me @ray suarez news. see you for the next "inside story" in washington, i'm ray suarez.
welcome to al jazeera america. i'm del walters. these are the stories we are following for you. business is brisk as marijuana retailers across the state of colorado open for business. insurance coverage begins for americans who enrolled under the affordable care act. and 2013 was a big year for wall street, we look ahead to 2014 to see if wall street can continue its winning ways. ♪ welcome to 2014. the fireworks are over and change is in the air. new leaders