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Federal Reserve Chair Ben Bernanke spoke yesterday at the American Economic Association annual meeting, in Atlanta, and he defended the Fed against the claim "that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years." Among the issues Bernanke addresses in his defense of Fed policy is the oft-repeated charge "that monetary policy was too easy during the period from 2002 to 2006." The aggressive monetary policy response in 2002 and 2003 was motivated by two principal factors. First, although the recession technically ended in late 2001, the recovery remained quite weak and "jobless" into the latter part of 2003. Real gross domestic product (GDP), which normally grows above trend in the early stages of an economic expansion, rose at an average pace just above 2 percent in 2002 and the first half of 2003, a rate insufficient to halt continued increases in the unemployment rate, which peaked above 6 percent in the first half of 2003. 3 Second, the FOMC's policy response also reflected concerns about a possible unwelcome decline in inflation. Taking note of the painful experience of Japan, policymakers worried that the United States might sink into deflation and that, as one consequence, the FOMC's target interest rate might hit its zero lower bound, limiting the scope for further monetary accommodation. FOMC decisions during this period were informed by a strong consensus among researchers that, when faced with the risk of hitting the zero lower bound, policymakers should lower rates preemptively, thereby reducing the probability of ultimately being constrained by the lower bound on the policy interest rate. Bernanke also took on the question of whether the Fed funds rate being, on average, 200 points below the values "implied by the Taylor rule" proves that monetary policy was too easy. ( click here for a slide of the Fed funds rate vs the Taylor Rule values). Bernanke argues that a fair assessment of the Fed's approach requires a comparison with the an adjusted, or alternative Taylor rule. Here's a slide Bernanke used during this portion of the speech: Bernanke: The distinction between current and forecast values does not always matter much, as (for example) high levels of inflation or output today may signal high levels of those variables in the future. However, over the past decade, the distinction between current and forecast inflation has been an important one. On several occasions during this period, surges in energy prices led to increases in overall inflation. According to the standard Taylor rule, whose policy prescription depends on the current value of inflation, these episodes should have led to a significant tightening of monetary policy. However, both the FOMC and private forecasters expected these increases in energy prices to subside--correctly, as it turned out--and therefore did not much adjust their medium-term forecasts for inflation. Consequently, policy was not tightened as much as would have been called for by the standard Taylor rule. Put another way, the standard Taylor rule makes no distinction between increases in inflation expected to be temporary and those expected to be longer lasting. In practice, however, policymakers have responded less to increases in inflation that they expect to be temporary, a reasonable strategy given that monetary policy affects inflation only with a significant lag. Slide 4 (above) shows the quantitative implications of this point. The actual paths of the policy rate, in blue, and the policy prescription implied by the standard Taylor rule, the dashed red line, are the same as in Slide 3. Also shown, as a dotted green line, is the monetary policy path prescribed by an alternative version of the Taylor rule that replaces the current rate of inflation on the right-hand side with a forecast of inflation over the current and subsequent three quarters. Forecasts are those that were actually made in real time, that is, at the time at which the corresponding policy rate was chosen. Read the full speech here .

The Federal Reserve enters its second day of the end-of-year policy meeting today with the news that Chairman Ben Bernanke is Time Magazine 's Person of the Year for 2009. Something tells us that Bernanke and the members of the Federal Open Market Committee will be able to keep their minds on the business at hand, as most economists and policy analysts expect the Fed to stick to what Reuters calls the current "super loose monetary policy stance." But as readers wait for a pronouncement later today, Time has a series of articles online about Bernanke and the Fed that are worth reading (and a photo gallery of Bernanke going back to his childhood as "the nerd from Dillon, South Carolina"). And this is not one of those "Person of the Year" selections based on the winner's sheer publicity. Time's editors are clearly crediting Bernanke with preventing the recession from getting worse. As Richard Stengel , Time's managing editor, writes: One scholar has written that the Great Depression of the 1930s could have been averted if the Federal Reserve at the time hadnt constricted the money supply, let a third of American banks go under and told Americans to tighten their belts. That scholar, Ben Bernanke, just happened to be chairman of the Federal Reserve when the economy this year appeared to be headed for a repeat performance. We've rarely had such a perfect revision of the cliché that those who do not learn from history are doomed to repeat it. Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it. Bernanke decided to do the opposite of what the Fed did back in the '30s: he would loosen the money supply as far as it would go, he would save as many banks as he could, and he wasnt going to hector the American public about pulling up their socks. Read the full tribute to Bernanke here . And also be sure to read the Q&A between Time editors and Bernanke here .

Fed Chair Ben Bernanke took to Capitol Hill yesterday to defend his record as the nation's top central banker. The White House nominated Bernanke for another term, and the Senate banking committee is his first stop in getting confirmation for another term by the Senate. He took a series of shots from Senators across the political spectrum. Jim Bunning (R-KY) told Bernanke "your time as Fed chairman has been a failure." Bernanke defended his record, and told the committee that the Fed's actions helped the nation avoid a much larger economic catastrophe: We played a central role in efforts to quell the financial turmoil, for example, through our joint efforts with other agencies and foreign authorities to avert a collapse of the global banking system last fall; by ensuring financial institutions adequate access to short-term funding when private funding sources dried up; and through our leadership of the comprehensive assessment of large U.S. banks conducted this past spring, an exercise that significantly increased public confidence in the banking system. We also created targeted lending programs that have helped to restart the flow of credit in a number of critical markets, including the commercial paper market and the market for securities backed by loans to households and small businesses. Indeed, we estimate that one of the targeted programs--the Term Asset-Backed Securities Loan Facility--has thus far helped finance 3.3 million loans to households (excluding credit card accounts), more than 100 million credit card accounts, 480,000 loans to small businesses, and 100,000 loans to larger businesses. And our purchases of longer-term securities have provided support to private credit markets and helped to reduce longer-term interest rates, such as mortgage rates. Taken together, the Federal Reserve’s actions have contributed substantially to the significant improvement in financial conditions and to what now appear to be the beginnings of a turnaround in both the U.S. and foreign economies. David Wessel , economics editor for the Wall Street Journal, has spent the last few years studying the Fed closely for his book, In Fed We Trust: Ben Bernanke’s War on the Great Panic. In a recent interview with Big Think , he spoke about how the Fed's response to the global economic crisis has largely worked, but still contains some risk and uncertainty: You can watch the full interview with Wessel here . And you can watch yesterday's Senate hearings here .

Add Fed Chair Ben Bernanke's voice to the growing chorus that the recession appears to be over and a long slow recovery is beginning. Bernanke spoke at the Brookings Insititution yesterday about the events of the last year, and during his speech he noted that he was well aware that forecasters were announcing the end of the recession. Here is a key excerpt from the speech. But the general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession, because of ongoing headwinds, including still ongoing financial and credit problems, you know, deleveraging by households, the needs for adjustments in the economy, sectoral adjustments in the economy, the need for a fiscal exit at some point, many, many factors that will likely, at least based on current information, make the 2010 recovery moderate, and in particular, not much faster than sort of the underlying potential growth rate of the economy. And the arithmetic is that unless the economy grows, you know, significantly faster than its longer term growth rate, it’ll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force, and therefore, the unemployment rate would tend to come down quite slowly. So that’s a risk, that’s a possibility. Of course, there is on both sides of that forecast; we could have a stronger recovery, we could have a weaker recovery, but if we do, in fact, see moderate growth, but not growth much more than the underlying potential growth rate, then, unfortunately, unemployment will be slow to come down. It will come down, but it may take some time. Obviously, that’s a very serious concern, and that’s one reason why, even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was, and so that’s a challenge for us and all policy-makers going forward. You can read a full transcript of the speech, and watch the full session by clicking here .

The Wall Street Journal 's August forecasting survey shows most of the participating economists feel the economy stabilizing: After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next. Gross domestic product in the third quarter is now expected to show 2.4% growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the "cash for clunkers" car-rebate program. Here's what the Journal's GDP forecasting trend looks like: This month the Journal asked economists to weigh in on Ben Bernanke. The Fed Chair has 6 months left in his current term, and the economists surveyed give him a 71% chance of being reappointed. Wall Street Journal news editor Phil Izzo discusses econiomists' views on Bernanke and the survey with Kelly Evans : Click here for full coverage of the survey, and here for the Journal's always useful interactive survey charts and graphs.

Wall Street Journal economics editor David Wessel 's work has been required reading/listening/viewing for anyone tracking the downs, and downs, and ups, and downs, and downs (you get the point) of the economy over the last year. Now he has a new book out: In Fed We Trust: Ben Bernanke's War on the Great Panic , Michiko Kakutani reviews the book in the New York Times , and calls it "essential, lucid — and, it turns out, riveting — reading." [Wessel's] overall assessment: “Every time officials at the Treasury or the Fed thought they finally had gotten ahead of the Great Panic, they turned out to be insufficiently pessimistic. This would be a distinguishing characteristic of this chapter in American economic history: even when officials thought they were planning for the worst-case scenario, they weren’t.” Three policy makers in particular receive low scores from Mr. Wessel. He argues that Mr. Paulson’s abrupt changes of course and failure to understand “the theater” of crisis management hurt his credibility and undermined public confidence. He says that President George W. Bush was “largely a spectator” to “the biggest threat to American prosperity in a generation” possibly because he knew how unpopular he was and figured “he would make Paulson’s job tougher if he appeared to be calling the shots” or because the Bush White House, “stumbling through its last few months, was simply exhausted and understaffed.” And he takes the former Fed chairman Alan Greenspan to task for allowing economic conditions to develop that fueled the credit crisis in the first place. Read the full review here . And read an excerpt of In Fed We Trust here .

Ben Bernanke has half a year left on his term as chair of the Federal Reserve , and at this point it is not certain whether he will be asked to serve another. Bernanke has said that he expects the economy to pick up later this year , and perhaps his future as chair depends on whether he is right or not. David Wessel , economics editor of the Wall Street Journal , assesses Bernanke's tenure in this short video, and says Bernanke "did a great job in saving us from something that could have been a catastrophe."

Federal Reserve Chair Ben Bernanke testified on the federal budget before the House Budget Committee today. He told the committee that he expects the US economy to grow later this year, and that, while recovery will be slow, he believes the federal government's overall response--and the Fed's approach specifically--has been effective in keeping the financial crisis for doing more damage. Here are three ways to catch his statement. 1) You can read his full statement, provided by the Fed here ; 2) You can watch an excerpt, thanks to the Wall Street Journal ; 3) You can watch some of the question and answer with Wyoming Rep. Cynthia Lummis (R), thanks to Cynthia Lummis; 4) Or you can read a fake interview from Mark Thoma , in which Thoma injects his own questions into Bernanke's prepared statement, and in the process provides some helpful context for the remarks. It's available here .