SEN. CASEY: I have two questions on that. Number one is, as a result of that -- the implementation of that policy, how much of a decline in long- term interest rates would you expect?

MR. BERNANKE: Well, we would expect something on the order of 20 basis points, approximately. We see this as being roughly approximately equal to something like a 50-basis-point cut in the federal funds rate. In that respect, it's a significant step but not a game changer in some respects.

SEN. CASEY: And in terms of the intended or hoped-for economic boost from that, what's your sense of that? How can you assess that?

MR. BERNANKE: Well, we think this is a meaningful but not an enormous support to the economy. I think it will provide some additional monetary policy accommodation. It should help somewhat on job creation and growth. It's particularly important now that the economy is close -- the recovery is close to faltering. We need to make sure that the recovery continues and doesn't drop back and that the unemployment rate continues to fall downward.

So I don't have a precise number, but I would just put it as a moderate support, not something that is expected to radically change the picture, but what should be helpful both in keeping prices near the price stability level but also providing some support for growth.

From the Q&A session

Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation.

I would argue that this view is extremely, and inappropriately, asymmetric in its weighting of the Fed’s dual objectives to support maximum employment and price stability.

Suppose we faced a very different economic environment: Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.

In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.

The most reasonable interpretation of our maximum employment objective is an unemployment rate near its natural rate, and a fairly conservative estimate of that natural rate is 6%. So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.

I think there are three elements to my concern. One was I thought that our description of the economy was overly pessimistic, that our language we used was not as optimistic as it might have been.

And I also think that the signal we send about 2013 signaled that we were pretty pessimistic for some time to come. I thought that was not appropriate.

I didn`t think the data justified it at this point. But even if we did justify that in terms of the outlook, I was concerned that now was not the time to make a policy decision.

The data had been very volatile. The stock market had been very volatile, and that it was inappropriate to react on a very short-term basis.  Monetary policy needs to be focused on the intermediate to longer term.

And I thought we were overreacting to the events. So I would prefer us to sort of sit tight for a little longer, let the data come in to get a better handle on the outlook and forecast.

Some of the weakness in economic activity in the first half of the year was due to temporary factors such as the hit to household income from higher food and energy prices, and supply chain disruptions following the tragic earthquake in Japan. These restraining forces have abated and thus, we should see stronger growth in the second half. But it is clear that not all of the weakness was due to these one-time factors—and in light of this, I have revised down my expectations for the pace of recovery going forward.

William C. Dudley said U.S. economic performance is “at worst, mixed,” with negative news offset by loosening credit, firmer retail sales and stronger bank balance sheets.

Banks are “in much better shape” than a year ago, with “huge liquidity buffers compared to where they were in 2008,” Dudley said today in response to an audience question after a speech in Lyndhurst, New Jersey.  Real-estate financing is “a little more available today than” 12 months ago.

{The sovereign debt crisis} is causing, as you know, a good bit of -- of anxiety in markets. And that's been affecting our economy, both last summer and now recently as well.

We are spending a lot of time evaluating the exposures of U.S. financial institutions to these countries, including money market mutual funds and so on.

See also a more extensive comment in Bernanke's June 22 press conference.

As we consider the national outlook, I would note that some have referred to the first half of this year as a “slow patch” in the recovery. I am not sure that phrase is quite right, however – the notion of a slow patch suggests strong growth that has been temporarily interrupted by some sort of headwind or shock, like natural disasters or extreme weather that crimps economic activity. I would instead describe the past two years as a consistently weak recovery, interrupted by a period of stronger growth.

There are millions of Americans stuck in unemployment lines desperate to find a way back into the productive economy.

“It wouldn’t be unimaginable to see 4 percent growth in the second half” of 2011, Fisher said today in a speech in Round Rock, Texas. “The price of energy and price of food has frightened the consumer,” he said. “As these prices come down a little, as we forecast they would, that relieves a little bit of the anxiety.”

“Recently, we have seen that state budget concerns can weigh on economic activity,” Evans said at the conference on state budgets under stress. “States now face a serious challenge in the recession and its aftermath,” with bases of revenue contracting faster than in previous years, he said.

“The last batch of data is disappointing and it is causing us to rethink our outlook for growth for the remainder of the year,” Lacker said to reporters after a speech today in Roanoke, Virginia. “We could be stuck below trend for some time,” he said.

...

Lacker, who votes on monetary policy next year, said he plans to revise his forecast for 2011 growth to below the 3.5 percent to 4 percent he expected in January. He declined to give a new forecast.

“I still think growth will pick up later in the year,” Lacker said. “The longer growth goes on at this disappointing pace, the more seriously you have to take the notion we are in for a period of growth at trend rate rather than above trend.”

A third round of asset purchases, or so-called quantitative easing, wouldn’t address the reason for the sluggishness, Lacker said.

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...

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.

We are lean and mean.  Our balance sheets are in great shape in America.  There is a lot of liquidity out there.  I am eager to see the trigger, and I don't know what it is for that money to be spent putting Americans back to work, committing to capital expansion.  It's jobs and unemployment.  American businesses are in very, very good shape.

Slow progress in closing resource gaps and a medium-term outlook for inflation that is too low lead me to conclude that substantial policy accommodation continues to be appropriate.