Breaking Wall Street Market News & Reports

Bernanke usually is considered the savior for “risk on” trading to markets and Wall Street. Not so much today. Markets had erased 80 points to close -19 on the DJIA. QE3 was also was not an option as markets have become increasingly addicted to extra liquidity. Markets are set to recover 2nd half of 2011. The highlight of the speech was Jamie Dimon of JP Morgan question to Bernanke that raised a lot of questions. See the complete summary below.

In Summary the outlook of the US Economy look weak….yet recovery is expected to pick in 2nd half.

On challenges facing consumers:

…households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence…

On the housing market:

…low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers….

On the Federal budget:

If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.

On Inflation:

…if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring….

On wages:

…because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation.

See the below transcripts and videos.

Bernanke Speaks on US Economy here

The following is the text of Federal Reserve Chairman Ben Bernanke’s speech on the U.S. economic outlook in Atlanta:

I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8% at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth–largely reflecting gains in equity values–and lower debt burdens have also increased consumers’ willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers–a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed–fell, remarkably, by nearly 10% from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6.5% below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6%. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment–nearly half of the unemployed have been jobless for more than six months. People without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed.

Although the jobs market remains quite weak and progress has been uneven, overall we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180,000 per month over the first five months of this year, compared with less than 140,000 during the last four months of 2010 and less than 80,000 per month in the four months prior to that. As I noted, however, recent indicators suggest some loss of momentum, with last Friday’s jobs market report showing an increase in private payrolls of just 83,000 in May. I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully.

The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital. Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets. Going forward, investment and hiring in the private sector should be facilitated by the ongoing improvement in credit conditions. Larger businesses remain able to finance themselves at historically low interest rates, and corporate balance sheets are strong. Smaller businesses still face difficulties in obtaining credit, but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well.

In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like.

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

The Outlook for Inflation

Let me turn to the outlook for inflation. As you all know, over the past year, prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline and other energy products and, to a somewhat lesser extent, for food. Overall inflation measures reflect these price increases: For example, over the six months through April, the price index for personal consumption expenditures has risen at an annual rate of about 3.5%, compared with an average of less than 1% over the preceding two years.

Although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. So far at least, there is not much evidence that inflation is becoming broad-based or ingrained in our economy; indeed, increases in the price of a single product–gasoline–account for the bulk of the recent increase in consumer price inflation. Of course, gasoline prices are exceptionally important for both family finances and the broader economy; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the U.S. economy. An important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. I will discuss commodity prices further momentarily.

Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation. To be clear, I am not arguing that healthy increases in real wages are inconsistent with low inflation; the two are perfectly consistent so long as productivity growth is reasonably strong.

The second additional factor restraining inflation is the stability of longer-term inflation expectations. Despite the recent pickup in overall inflation, measures of households’ longer-term inflation expectations from the Michigan survey, the 10-year inflation projections of professional economists, the 5-year-forward measure of inflation compensation derived from yields on inflation-protected securities, and other measures of longer-term inflation expectations have all remained reasonably stable. As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation. That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.

As I noted earlier, the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending. Let’s look at these price increases in closer detail.

The basic facts are familiar. Oil prices have risen significantly, with the spot price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40% from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months. When the price of any product moves sharply, the economist’s first instinct is to look for changes in the supply of or demand for that product. And indeed, the recent increase in commodity prices appears largely to be the result of the same factors that drove commodity prices higher throughout much of the past decade: strong gains in global demand that have not been met with commensurate increases in supply.

From 2002 to 2008, a period of sustained increases in commodity prices, world economic activity registered its fastest pace of expansion in decades, rising at an average rate of about 4.5% per year. This impressive performance was led by the emerging and developing economies, where real activity expanded at a remarkable 7% per annum. The emerging market economies have likewise led the way in the recovery from the global financial crisis: From 2008 to 2010, real gross domestic product (GDP) rose cumulatively by about 10% in the emerging market economies even as GDP was essentially unchanged, on net, in the advanced economies.

Naturally, increased economic activity in emerging market economies has increased global demand for raw materials. Moreover, the heavy emphasis on industrial development in many emerging market economies has led their growth to be particularly intensive in the use of commodities, even as the consumption of commodities in advanced economies has stabilized or declined. For example, world oil consumption rose by 14% from 2000 to 2010; underlying this overall trend, however, was a 40% increase in oil use in emerging market economies and an outright decline of 4.5% in the advanced economies. In particular, U.S. oil consumption was about 2.5% lower in 2010 than in 2000, with net imports of oil down nearly 10%, even though U.S. real GDP rose by nearly 20% over that period.

This dramatic shift in the sources of demand for commodities is not unique to oil. If anything, the pattern is even more striking for industrial metals, where double-digit percentage rates of decline in consumption by the advanced economies over the past decade have been overwhelmed by triple-digit percentage increases in consumption by the emerging market economies. Likewise, improving diets in the emerging market economies have significantly increased their demand for agricultural commodities. Importantly, in noting these facts, I intend no criticism of emerging markets; growth in those economies has conferred substantial economic benefits both within those countries and globally, and in any case, the consumption of raw materials relative to population in emerging-market countries remains substantially lower than in the United States and other advanced economies. Nevertheless, it is undeniable that the tremendous growth in emerging market economies has considerably increased global demand for commodities in recent years.

Against this backdrop of extremely robust growth in demand, the supply of many commodities has lagged behind. For example, world oil production has increased less than 1% per year since 2004, compared with nearly 2% per year in the prior decade. In part, the slower increase in the supply of oil reflected disappointing rates of production in countries that are not part of the Organization of the Petroleum Exporting Countries (OPEC). However, OPEC has not shown much willingness to ramp up production, either. Most recently, OPEC production fell 1.3 million barrels per day from January to April of this year, reflecting the disruption to Libyan supplies and the lack of any significant offset from other OPEC producers. Indeed, OPEC’s production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle.

Production shortfalls have plagued many other commodities as well. Agricultural output has been hard hit by a spate of bad weather around the globe. For example, last summer’s drought in Russia severely reduced that country’s wheat crop. In the United States, high temperatures significantly impaired the U.S. corn crop last fall, and dry conditions are currently hurting the wheat crop in Kansas. Over the past year, droughts have also afflicted Argentina, China, and France. Fortunately, the lag between planting and harvesting for many crops is relatively short; thus, if more-typical weather patterns resume, supplies of agricultural commodities should rebound, thereby reducing the pressure on prices.

Not all commodity prices have increased, illustrating the point that supply and demand conditions can vary across markets. For example, prices for both lumber and natural gas are currently near their levels of the early 2000s. The demand for lumber has been curtailed by weakness in the U.S. construction sector, while the supply of natural gas in the United States has been increased by significant innovations in extraction techniques. Among agricultural commodities, rice prices have remained relatively subdued, reflecting favorable growing conditions.

In all, these cases reinforce the view that the fundamentals of global supply and demand have been playing a central role in recent swings in commodity prices. That said, there is usually significant uncertainty about current and prospective supply and demand. Accordingly, commodity prices, like the prices of financial assets, can be volatile as market participants react to incoming news. Recently, commodity prices seem to have been particularly responsive to news bearing on the prospects for global economic growth as well as geopolitical developments.

As the rapid growth of emerging market economies seems likely to continue, should we therefore expect continued rapid increases in the prices of globally-traded commodities? While it is certainly possible that we will see further increases, there are good reasons to believe that commodity prices will not continue to rise at the rapid rates we have seen recently. In the short run, unexpected shortfalls in the supplies of key commodities result in sharp price increases, as usage patterns and available supplies are difficult to change quickly. Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies. Likewise, over time, high prices should elicit meaningful increases in supply, both as temporary factors, such as adverse weather, abate and as investments in productive capacity come to fruition. Finally, because expectations of higher prices lead financial market participants to bid up the spot prices of commodities, predictable future developments bearing on the demands for and supplies of commodities tend already to be reflected in current prices. For these reasons, although unexpected developments could certainly lead to continued volatility in global commodity prices, it is reasonable to expect the effects of commodity prices on overall inflation to be relatively moderate in the medium term.

While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15%. However, since February 2009, oil prices have risen 160% and nonfuel commodity prices are up by about 80%, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar. For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008; the dollar’s decline since then in substantial part reflects the reversal of those flows as the crisis eased. Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.

Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks.

Finally, some have suggested that very low interest rates in the United States and other advanced economies have created risks of economic overheating in emerging market economies and have thus indirectly put upward pressures on commodity prices. In fact, most of the recent rapid economic growth in emerging market economies appears to reflect a bounceback from the previous recession and continuing increases in productive capacity, as their technologies and capital stocks catch up with those in advanced economies, rather than being primarily the result of monetary conditions in those countries. More fundamentally, however, whatever the source of the recent growth in the emerging markets, the authorities in those economies clearly have a range of fiscal, monetary, exchange rate, and other tools that can be used to address any overheating that may occur. As in all countries, the primary objective of monetary policy in the United States should be to promote economic growth and price stability at home, which in turn supports a stable global economic and financial environment.

Monetary Policy

Let me conclude with a few words about the current stance of monetary policy. As I have discussed today, the economic recovery in the United States appears to be proceeding at a moderate pace and–notwithstanding unevenness in the rate of progress and some recent signs of reduced momentum–the labor market has been gradually improving. At the same time, the jobs situation remains far from normal, with unemployment remaining elevated. Inflation has risen lately but should moderate, assuming that commodity prices stabilize and that, as I expect, longer-term inflation expectations remain stable.

Against this backdrop, the Federal Open Market Committee (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero and further easing monetary conditions through large-scale asset purchases. The FOMC has indicated that it will complete its purchases of $600 billion of Treasury securities by the end of this month while maintaining its existing policy of reinvesting principal payments from its securities holdings. The Committee also continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate.

Bernanke’s Q/A session here

Transcript from CNBC

The chairman has graciously accepted questions from the members, and just remind the media that the imc rules are such that members only, please, will ask the questions. will ask the questions. will ask the questions. the lights are quite bright. so it’s hard seeing the faces past the first row. so i think it’s easier if you also identify yourself and we’llrecognize you by putting up your sign. please. thank you.chairman bernanke, i’m from the bank in asia, and two questions, sir. first thing, in respect of the recovery in the u.s. economy, you mentioned that — the region or state where – my first question. the second question relates to the — many analysts or economists in asia are predicting further weakening against most currencies. on three counts. i think on the count of stronger fundamentals in the asian economies, of the united states, secondly — enjoyed by the asian economies and, third, the expected in the holding of assets in the foreignfederal reserves of most asian countries would there be – for u.s. to increase the interest rate base? on the first question, ofcourse, there is a certain amount of variance across the nation in terms of unemployment, in terms of growth. certain states, north dakota comes to mind and very low employment rates.mun of the main characteristics, they experience bigger booms and busts in the housing market. you have some states where the housing market has fallen sharply and the impact onconsumer spending confidence, construction and so on, has made the recession and the worse, and the recovery slower. in those states. with respect to the dollar, first, in the median term, any financial textbook will tell you the exchange has two parts.first of all, the inflation differ rebel. the difference between inflation a at home and inflation abroad and those that mecher real fcters such as productivity, for example. in the united states the federal reserve has been successful in keeping inflation low and stable since the late 19 80s. indeed since the mid-90sinflation in the u.s. has been lower than in other economies,and it’s lower than many other economies today. so the federal reserve’s efforts to keep inflation low and in a particular, in many cases lower than our trading partners, 1 a positive factor for the dollar. likewise, the real — for foreign capital flows. so, again, to the extent that the economy is growing, and that tract investment opportunities that will acontract capital foreign flows and that will strengthen the dollar. there’s a very strong case what the fed needs to do to provide good fundamentals for the dollar in medium term is first to keep inflation low and stable andsecond help the economy recover and be strong and that isexactly the federal reserve’s mandate. i see no inconsistencewhatsoever between achieving our — and providing a backdropfor the dollar. it’s also true fluctuates over the short run. look at history of the dollar. there are many periods of sharp movement up and down. recently two factors. one i mentioned before, theflights to quality as the world, as investors around the worldexperienced greater risk oh version during the crisis period in the fall of ’08. the dollar becomes very attractive, because of the depth and liquidity at u.s. financial markets, and those periods of risk on — sorry. risk off, have caused the dollar to appreciate very strongly. then when the risk pattern is reversed and people become more comfortable, the dollar tends to reverse that pattern, and we’ve seen that several times during the crisis. the other factor, which is affecting the dollar, is the fact that the u.s. economy is in a quite weak cyclical position particularly to emerging markets, including asia at this pont and that’s the fundamental reason why at this moment returns are perceived as lower in the u.s. than other economies. again, the best way to deal with that fundamentally is to help the u.s. economy recovery. a strong u.s. recovery will support fundamentals to thedollar and will also be good for the world economy, because theworld economy notwithstanding tremendous growth around theworld, still depends significantly on a healthy u.s. economy. we now have a number of questions. ed clark, citibank. you indicated that the optimum solution would be to find a long-term solution to addressing the u.s. fiscal problems and thestructural issues, leaving room that you can continue to havefiscal student in the short run as you come out. those issues cannot be resolved politically, where would you come down choosing to withdraw fiscal stimulus, to have it paid out to the capital markets of the fiscal as a result, or say, no. that would be too impactful and therefore, we should keep the stimulus?you’re asking me to choose between two very inferior outcomes, and i preserve not to do that. let me reiterate what i said, if you don’t mind, which is our problems — it’s very important to understand that while our fiscal deficit this year is extraordinarily high. a great deal is due to the weakness in economy and at least some of it will vanish as the economy strengthens.fundamentally, the u.s. fiscal problem is a larger problem andshould be addressed and a long-term basis and we can do that in a way that is credible, that persuades bond markets, that the u.s. government is sincere about bringing its finances under control, but we can do that in a way that doesn’t create an short term fiscal — i would balance those two objectives. steve, i think you’re next. mr. chairman, steve wilson. united states banker.first and foremost, thank you very much for taking your valuable time to be with us today. m my question resolves around anyconcern you might have given our still struggling economy withthe overwhelming number and vol yoom of regulations that aregoing to be coming out over the next year, as that would relate to availability and cost of credit. and if do you have concerns there what can be done to lessen that impact? first, let me say that while it is true that there are a lot of regulations in the. i line.there’s a good reason why financial regs regulation has been reformed. as you know, we’ve just been through the worst financial crisis since the great depression, and the reasons forthat crisis were very diverse. there are very many reasons. but certainly gaps and problems in the financial regulatory system were part of the problem and, therefore, it is very important that we, as we have done, take a — take a long look at the system and try to improve it and strek strength didn’t to significantly reduce the risk of a crisis and if the crisis occurs, increase the resilience so the impacts on the economy would be less. it’s very important we address those issues, and we are trying to do that. now, reducing the rick of crisis is important, an importantobjective and we need to take actions to do that. we would like to do that in a way that minimizes the impact on credit availability. knowing we won’t always succeed, but in several ways we are trying to do that. one in particular, the federalreserve as we develop our regulationsened rooms, of course, we go through a comment process and we get input through a lot of different mechanisms and are certainly trying to develop regulations and the accompanying supervisory sflu a structure in a with that will have maximum impact on reducing financial risk and increasing financial resiliency while minimizing as much as possible the impact on the legitimate and important functions of the banking system and financial system. so we are very adefinitive to that issue. anybody who’s worked with thefederal reserve would confirm that. the second thing that we aredoing, broadly, is we are working with the internationalcommunity. we want to make sure that there are not — or there are a minimum number of — as much as possible, we can develop a level playing field. that we can leave open space forcompetition and innovation in the global financial system. so we’re looking careful with our international partners and in particular i want to ask about that. basel, in basel 3 rules,involving both capital and liquidity, we are facing those very slowly. that’s one reason — one reason we’re doing that, of course, besides giving banks the time to develop systems and so on is to, you know, minimize the near-term effects on credit costs and credit availability. we’re lookingality both things but have a trade-off. top reduce the risk of crisis, conditional on that we’ll do what we can to minimize the impact on costs and on credit availability. i think doug. developing that a little bit, i think.in terms of the contingent risks that are highlighted from the recent crisis, are you satisfied with the commitment to and momentum towards cross-border resolution, and how do you see that playing out in terms of the mechanisms to achieve that, and also the existence today of some emerging difference in the application of regulation and what are global markets like derivatives seems to pose quite a challenge. i’ll grateful for your thoughts. thank you. certainly. a difficult and importantquestion. i had a very productive meeting, by the way, with miss suhr and we discussed collaboration on regulatory reform and the two jurisdictions, united states and europe, are strongly committed to working together to create as consistent a system as possible. cross-border resolution is one of the most difficult problems that we have. for us currently we have different bankruptcy laws. different systems. not only say in this casebetween the united states and europe, but with europe and withmany jurisdictions around the world. there are challenging problems to be solved there. i’ll say two thing answer that. one is that there is a serious effort ongoing both here and in europe to improve the resolution process. as you know, dodd frank includes a resolution plan, a resolution set of rules. the fdic take talk about this. the fdic is trying to develop the information, skills and tools it needs to resolve a failing institution one being the living will, which you probably are familiar with. part of that process, she and others in the community have been in close contact with our counterparts. mostly in europe. trying to establish agreements and ways of working together so we can address a circumstance that would arise if there were a multi-national firm in stress. but more specifically, the europeans are, in fact, and to the basel committee are trying to address this directly by developing resolution mechanisms for europe. i would say this is a long process, because there are many legal issues to be addressed, and we’re dealing with very complex firms, et cetera, but we have to start somewhere, and i think a good start has been made. i would add in addition to that that many of the regulations, capital requirements, liquidityrequirements and things mentioned in the earlier question really are complementary. we want to reduce the accessiverisktaking by large financial firms and reduce their risk of failure and increase the resilience of the system to a failure. so that’s complementary to the resolution regime and if possible we would like to avoid getting into a resolution situation, if at all possible. so that is a very difficult process, but we are — you know, we have made a good beginning, and we will continues to work with our partners internationally thinking about specific firms but also thinking about legal frameworks for resolution.you mentioned derivatives and other financial instruments.there are, at this point, there are some areas where at least atthe moment we don’t have full surface consistency acrossjurisdictions. as you know, the united states recently issued some rules and recently issued some rules and over the counter derivatives which include requirements that are not yet part of the law, part of practice in europe. but i’d like to say about that, that we are very aware of these discrepancidiscrepancies. we don’t want to create unlevel playing fields or create incentives for firms or market participants to switchjurisdictions to avoid regulatory requirements. therefore, we very committed, again to working with our partners internationally to try to achieve as much consistency as possible, and we will continue to work on that, and, please, don’t worry that we’ve somehow neglected that point. we heard a great deal about the inconsistencies that already exist, and we really have a full-court press in place to try to find ways to minimize those differences. i think jacob is your next – thank you. mr. chairman, you defined very well the fed and the observation that the recent developments in energy crisis have not yet made their way to long-term inflationary expectations.so, so far so good, and yet at the same time the real interestrates in the united states are negative and all i can say so under current circumstances, and i wonder whether aside from theinflationary issue that you cover, are you concerned with some other extortions that may arise, if it maintains in the same way?and while i have you, mr. chairman, may i have another quick question? we discussed in a different way the issue of shadow banking, and when there was concern about how the regulations is going to address that issue with a concern that because of the fact it’s so difficult to articulate specific recommendations to that shadow banking sector, much of the effort may end up being regulating the shadow banking through regulations of the regulated banking system. and namely, incorrect – indirectly through them. can you maybe shed some light on this? certainly. on the issue of distortions, that is a concern. it certainly is. vice chair yellin gave a speech a few days ago talking about what the federal reserve is doing on this front. my view on this, and this goes become to the very first speech i ever gave as a governor on the board is that to the extent possible, want to use the right tool for the job and the first line of defense, against these distortions is good supervision and good regulation, and we at the federal reserve and along with other regulators have greatly stepped up our game in terms of our ability to monitor what’s happening in thefinancial system, and we take these issues very, very seriously, and janetal spee jan talked in some deal about the tools we have. institutional changes we’ve made and enormous resources we made in this financial system and the like. in most cases, where we have identified problems, they can beaddressed through regulatory or supervisory means. and that would be far preferable than using the interest rate tool which is a very blunt tool and better directeded at mac economics than at financial stability nap would be our first choice if those tools fail,you’ll have to think further, but right now, we believe that using supervisory regulatory tools and monitoring plus thestrengthening of the system as we’ve been talking about will bea sufficient response. on shadow banking. shadow banking is a broad term and includes many different kinds of institutions.many of them are being addressed to some extent by the changes in the rules, for example. there have been reformswearing — give you a sense of the shadow banking system.there’s been toughening of accounting rules to force banks to take more off balance sheets, or strength’sed securitizationrules, et cetera, et cetera. the rules and regulations areaddressing many aspects and we’re broadly, of course, with amacro prudential approach, an approach which focuses on thestability of the overall system, both the federal reserveindividually and stability oversight committee collectively have the authority and responsibility to monitor what’s happening throughout the financial system and take action as needed. so while we are, you know, certainly far from the no doubt there will be many things we will not see, the attitude is much different.much more committed towards systemic stability and the ideaonce the problem leaves the particular institution that you’re supervising and is somebody else’s problem that attitude is gone. we’re thinking collectively and cooperatively an the system. i do think we are addressing shadow banking issues and conclude my answer to your question noting that once again this is an international process, and the basel network,the basel committee’ss are looking at — including the national stability board are looking at shadow banking as well and probably there will be international recommend asianss to apply the shadow bank. as you said, mr. chairman, it’s shadow banking, it’s a very broad term, and many of us here in the laeger to world, or the financial institutions, regulatory, we’re starting to call it dark cloud now. you see. i have now, i guess, a mike smith, and then i have jamie dimond. that’s next. mike?chairman bernanke, from austral australia. i’d like to go back to some of it’s comments you talk about on liquidity and on basel 3. i know that these rules are still being discussed, but looking at the original proposals, they were somewhat inflexible to a number of banks and would certainly give more to the american european banks who had act government securities. and my question to you, really, is, is your views on the – whether individual central banks will need to ensure the stability of the country’s financial system? really, surely, it’s more their choice as to what an asset type they retail in times of systemic — in that maybe this is a global consistency actually should take second per se to national interests? let me say first a word aboutliquidity regime in general. then i’ll address your specificquestion. we have been working with capital requirements for 20 years. we just are beginning to think about liquidity. clearly, we’re at very early stages in imposing this regulation. that said, they really did have to act in this area given what we saw in the crisis where liquidity was often — one of the precipitating issues in the panic. let me just say about the process on liquidity. the basel process on liquidity. you know, we are moving verysloesly on it. it will not take effect until i think 2015. we did a number of things we want to go as woe go forward. first, have the right structure. currently there’s a double structure, the lcr and the nfsr, the short term and long term liquidity rules. is that the right structure? that requires still more thought and analysis. a point a number of bankers made, in some cases the calibration may not be ridght. the instrumentation weight may not be right and we are looking at those as well. and finally a particular concern of the federal reserve, as we make changing requiring banks, for example to hold more liquidity, or to have more long-term liabilities, what are the implications of that for the broader financial system? what are the implications for the commercial market? the money market mutual fundsand so on. we need to do more thinking and we are doing so both at the federal reserve but also through the basel process.about the so-called general equilibrium effects of the rules. so there’s a lot of work to be done on this. again, it’s basic principle we need to address the issues of liquidity revealed by the crisisis still there and very important. we recognize that it’s going totake time and experimentation to get a regime that is botheffective and also doesn’t impose xuxzive costs on the – in terms of individual countries, the united states perhaps like australia has many unique features that other countries don’t have. i don’t know who else, what other countries ever heard of a federal home loan bank, for example, and many other elements of our banking system. and so, of course, there is noformal agreement, no legal agreement that requires eachcountry to have precisely the same rules and with generalbounds, and with good reason, there will be deferraleifferentphilosophies because in the end these rules are national incharacter, not international in their legal basis. jamie, please?mr. chairman, jamie dimond, jpmorgan chase. i have a totally, completely agree when he a crisis and that it entailed doing a lot of things to fix and reduce risk. i have a great fear someone’s going to write a book in 20 years and the book is going to talk about all the things that we did in the middle of a crisis to actually slow down recovery. i don’t personally buy theargument because there’s a financial crisis, it has to take a long timei icoming out. i made a list of the things already done and a few things to be done. most of the bad actors are gone. thift thrifts, old mortgage brokers and obviously some banks. some of gone, z zivs, money mar funds far more transparent.derivatives gone. transparency in — fannie mae and freddie mac in the government hospital. higher capital and liquidity already in the marketplace. we estimate more than double than it was before. there are tougher requirements, boards are tougher.risk committees tougher. oversight committee regulationsmuch toucher in every way, shape possible. one of the course of problem with mortgage underwriting, gone back to what it was 30 years ago. it’s a good thing, but no more subprime, no more resident, no more packaged. the cnbs market has beencompletely reformed. far more transparent accounting. we’ve been through two stress tests one at treasury one at the fed.the bank passed, the recent ones with flying color, partially forthe reasons i just said. now told higher capital requirements, the so-called charges et cetera and know there are 300 rules coming. has anyone bothered to studied cumulative effect of all of these things and do you have a fear like i do that we will lookak and look at them all, they that will be the reason it took so long that our banks and businesses — most importantly, job creation isn’t going again. is this holding us back? that list you gave me made me feel pretty good for a while. sounds like we’re getting a lot done. that’s great. well, the — the crisis revealed lots of weak spots. lots of problems, and we are – you know, it’s a comprehensive. the most comprehensive reformsince the 1930s and we’re trying to execute it and trying toaddress all of the problems and you didn’t mention three or fourothers i could think of. so, yes. it was a big problem. it has a huge impact. there were many, many sources. i think one of the — this is sort of just a pet peeve is that many people tried to say, the single cause of the crisis was x. there was no single cause of the crisis in respect were many, many different causes thatinteracted in a way in many ways where unpredictable and led to the disaster we experienced. so there are many, many thingsto fix. we’re working on them and making, i hope, a lot ofprogress. has anybody done a comprehensive analysis of the impact on credit? i can’t pretend that anybody really has. you know, it’s just too complicated. we don’t really quantitative tools to do that. but we are trying, and i’ll speak for the federal reserve, we are trying to move as expeditiously as we can todevelop new framework, and set traditions consistent with doing it right. trying to develop rules that make sense, that are consistent with good practice. but which do not unnecessarilyimpose costs, or impose costs, or unnecessarily constrict credit. the second thing, i realize many of you here are heads of large institutions, but you know, you think it’s difficult forjpmorgan chase, it’s very, very difficult for the small banker, for the community banker, and we have set up a number ofdifferent screens, filter, committees, processes in the federal reserve to try to make sure that when new rules are put in place, that the smaller institutions are sheltered from them as much as possible. unless there’s a necessary impact. so i hear what you’re saying. we’re very — there’s a traysoff ther trade-off. we have to take steps to make sure we don’t have a repeat of what happened. i think we can do that in a way that preserves the key functions of banking, allows credit to be extended, allows banking finance servicesextended, but there is trade-off and you’re right to point that out. it’s probably going to table a little bit of time before we, over time, figure out where the cost exceeds the benefit and we make the appropriate adjustments, but to answer your question, nobody’s looked at it in all detail, but we certainly are trying as in each part to develop a system that iscoherent and that is consistent with banks performing their vital social functions of extending credit and providing other key financial services. jamie said that, it’s caused — more than i would, on behalf of all the members of the imc, it’s been a recurring theme. you can understand. obviously, the necessary changes in the credential side and we all support that, but, ofcourse, they’re coming quite quickly. and then, of course, the need to find the balance for growth of jobs, and there’s certainlyangst not just among american members but many, many of us in the audience. appreciate the comment. jim? okay. i think we covered jim’s, i guess, question. we have time for one more, ifthere’s any — anymore. let me just say we’re not only honored but, as i said in my opening remark, we’re all leaders of our own institutions, and certainly a lot easier to lead when the winds at your back, but when we face head winds it becomes very, verydifficult, of course for yourself, where you are the head winds have been very, very significant. but as you did say, and i knowfrom many of us the federal reserve has always been listening in a collaborative way if at all possibly knowing you have a wide mandate to do what you have to do but we certainly appreciate the collaborative nature of the federal reserve and for you to take your time out as we’ve come from around the world to spend a very high-quality hour with us. we thank you very much.

Jamie Dimon’s question here