REED: Chairman Bernanke, I assume you're familiar with two recent reports by Moody's Analytics and Goldman Sachs which talked about the proposed House Republican budget. Their conclusion is that if passed without modification, there could be as much as a 2 percent decrease in the growth next year, going forward and as many as 700,000 jobs lost because of the contraction of spending at the federal level.  Do you agree with those -- that analysis?

BERNANKE: If that's referring to a $60 billion cut, obviously, that would be contractionary to some extent, but I -- for us -- our analysis doesn't get a number quite that -- doesn't give a number that high.

REED: Well, the proposed cut this year is $100 billion in the House. Is that you what used for your projections?

BERNANKE: We are assuming $60 billion this year and $40 billion next year, which would be the $100 billion over the fiscal year. And we also assume a normal spend-out, the way -- you know, the impact is not immediate, but is spent out over time. The reduction is effective over time. And we get a -- we get a -- I would have to say, a smaller impact of that. I'm not quite sure where that...

REED: What is your impact?

BERNANKE: Several tenths on GDP.

REED: And jobs?

BERNANKE: I don't have that number, but it would be certainly much less than 700,000.

...

BERNANKE:  But I still -- I still don't -- I'm happy to send you our analysis, Senator. But I frankly don't understand where -- 2 percent is an enormous effect; 2 percent of the -- of the -- of the GDP is $300 billion right there. So assuming a multiplier of -- of 1, you know, $60 billion to $100 billion, is not sufficient to get to that level. But it would, of course, have the effect of reducing growth on the margin, certainly.

Monetary policy works with a lag, and therefore we can't wait until we get to full employment and, you know, the target inflation rate before we start to tighten. We have to think in advance, which means we have to use our models and our other forms of analysis and market indicators and so on to try to project where the economy is heading over the next six to 12 months.

Once we see the economy is in a self-sustaining recovery and employment is beginning to improve and labor markets are improving, and meanwhile that inflation is stable at approaching roughly 2 percent or so, which I think is where you want to be in the long term on inflation. At that point, we'll need to begin withdrawing.

It's the same problem -- I just want to emphasize this -- it's not at all different from the problem that central banks always face, which is when to take away the punch bowl. And the only way you can do that is by making projections of the economy and -- and moving sufficiently in advance that you don't stay too easy too long. And we're quite aware of this issue and quite committed to price stability and we will continue to analyze our models and our forecasts and -- and move well in advance of the time that -- well in advance of the time that the economy is, you know, completely back to full employment.

From the Q&A session

MR. KERNEN: I remember before QE2 started we were with you in St. Louis, and you gave us a little bit of a head fake here and there about whether it would actually -- that it was a done deal, that it was going to happen, when I think it was going to happen all along.

Now I feel like you're giving us a little bit of a notion that "We might end early" when, in fact, there's no intention of ending early.

MR. BULLARD: I'm telling you what I think. I'm just one guy on the --

MR. KERNEN: I know.

MR. BULLARD: -- one guy on the committee. You can talk to anyone else and see what they say.

MR. KERNEN: There won't be any QE3, though.

MS. QUICK: We did have a guest who sat here last week and said higher oil prices means we're looking at QE3. Is that --

MR. BULLARD: Well, I don't think we're in that position yet.   This has not gone on long enough. You'd have to see if the shock is really persistent. Also it doesn't strike me that it's really big enough at this point. You're talking, if I've had the numbers right, 98 bucks on West Texas Intermediate this morning. That's up. You know, it's certainly a concern, but it's not so high at this point.

As long as inflation expectations are managed pretty well, I think we’re going to get through this [period of elevated oil prices] without a big burst of inflation.

Surging oil prices are now on the front burner as unrest in the Middle East has driven a surge in those costs. Plosser said he doesn't see much of an economic threat to the U.S. thus far, saying those disruptions are "less likely to be a problem for our economy than perhaps the challenges in Europe" generated by the government debt crisis there...

But he did allow he was monitoring the commodity situation, and said "oil would have to rise significantly more [than current levels] and stay there for a while to have dramatic effects on GDP growth."

From the press Q&A session, as reported by Dow Jones

To put it bluntly, with unemployment too high and inflation too low — and both forecasted to stay that way over the next two years — we have missed on both of our policy objectives. There is currently no policy conflict between improving the employment and inflation outcomes. This leads me to conclude that accommodative monetary policy continues to be beneficial for achieving each of these goals.

[W]e are seeing signs that the overall economy is gradually improving. Manufacturing continues to expand, export activity has risen, and companies are investing in equipment again. Consumer spending also finished on a positive note last year. But we are still facing some headwinds. In particular, the housing market remains depressed, which weakens household balance sheets. Also, income growth is likely to be constrained by high unemployment rates, and credit conditions remain tight, especially for some small businesses. Keeping these factors in mind, I expect that the pace of economic growth for this year will continue to be moderate.

After all, soft patches are not uncommon during economic recoveries.

[W]ith output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

Improvement in the labor market has lagged broader economic recovery... I expect the unemployment rate to fall over the coming years, but I think it unlikely that jobs growth this year will be strong enough to generate quick improvement.

The Committee recognized that the provision of further monetary stimulus at this point in the business cycle is not without risks, and therefore committed to regularly review the pace and overall size of the asset-purchase program in light of incoming information and adjust the program as needed. The distinct improvement in the economic outlook since the program was initiated suggests taking that re-evaluation quite seriously. That re-evaluation will be challenging, because inflation is capable of accelerating, even if the level of economic activity has not yet returned to pre-recession trend.

I expect noticeably stronger growth in overall activity this year than last. If I had to write down a forecast today, it would be pretty close to 4 percent. A rate of growth in that neighborhood would result in continued net gains in employment and further reduction in the unemployment rate.

"Even though we have achieved liftoff, we are by no means rocketing to the moon," he said. While current economic growth rates are "respectable and improving," he said, the recession slashed output so deeply that it still has a long way to go.

As reported by Reuters

The economist said he's not concerned with "too much inflation, but rather too little".

As reported by Bloomberg News

"Even though we have achieved liftoff, we are by no means rocketing to the moon," he said. While current economic growth rates are "respectable and improving," he said, the recession slashed output so deeply that it still has a long way to go.

As reported by Reuters

The economist said he's not concerned with "too much inflation, but rather too little".

As reported by Bloomberg News

Even with the December changes in fiscal policy, I would say that I expect that real GDP growth will probably be closer to 3 percent than 4 percent in 2011.