BERNANKE: Well, I think it's -- it's quite true that business confidence, home builder confidence, consumer confidence are -- are very important. And good policies promote confidence.

That's -- the Fed policy, congressional policy, we want to try to create a framework where people understand what's happening and -- and they believe they have confidence that -- that the basics of macroeconomic stability will be preserved.

It is a difficult thing, you know, to some extent it's a political talent to create confidence in -- in your constituents. So nobody has a magic formula for that. But, clearly, the more we can demonstrate that we're working together to try to solve these important problems, the more likely we're gonna instill confidence in the public. And that, in turn, will pay off in economic terms.

The other important point to make here is when we're doing purchases, if we continue to do purchases, we're adding stimulus. And people act like if we dial the rate of purchases down somehow we're tightening monetary policy. What we're actually doing is adding less stimulus.

Upon hearing those two different plans for interest rates, people should have different expectations for what the paths of economic activity and unemployment are going to be. And, in particular, between the 7 percent plan and the 5 1/2 percent plan, the second suggests that times are going to be better for them in general, going forward. It means that individuals don’t need to save as much for bad times ahead. That’s the basic point of providing such forward guidance, to convey the expectation that because times will be better in the future, individuals don’t need to save as much and therefore can spend more now.

The surest sign that a recovery is on its way and that financial markets are on the mend will be an inflow of private capital into the banking system and a broad-based increase in bank lending. Since the beginning of the year, we have seen declines in commercial and industrial loans as well as loans for commercial real estate. On the other hand, consumer and residential mortgage loans are again increasing, particularly for refinancing. As economic conditions stabilize, more households and businesses will have the confidence to borrow, and more borrowers will become better credit risks. Both developments will contribute to economic growth.

Lacker expressed skepticism about declines in various gauges of consumer confidence or consumer sentiment. He called them "kind of crude measures" and said "it's hard to make anything out of them."

"Sometimes they dip sharply without any deflection in the path of consumer spending," he said, while "sometimes they are a harbinger of significant (slowing) of consumer spending."

From comments to press, as reported by Market News International

As home price escalation slows, consumers can be expected to feel less confident about gains in wealth and may well begin to feel inclined to save more and spend less. These indirect effects of a housing slowdown are embedded in my forecast of some slowing in the growth of consumer spending.

A decline in consumer confidence is another channel through which a correction in house prices could affect the economy. In the current situation, a sizable deceleration in house prices could have an outsized effect on consumer confidence and thereby reduce household spending by more than is implied by conventional estimates of the wealth effect.

In recent years, market confidence has been so great that only a string of poor policy decisions would have changed inflation expectations.

Market confidence in the Federal Reserve’s ability and willingness to maintain a low trend rate of inflation has been a core characteristic of the Greenspan regime...Examination of current survey data and the spread between the yields on conventional and indexed Treasury bonds indicates that market confidence in continuing low inflation extends well beyond Greenspan’s tenure as Chairman. Institutionalizing market confidence in the Federal Reserve is a great accomplishment.

This apparent disparity in sentiment between business people and market participants could reflect the heightened additional concerns of business executives about potential legal liabilities rather than a fundamentally different assessment of macroeconomic risks.