Well I think being at the zero lower bound is not a very comfortable place to be because, one, the tools of monetary policy at the zero lower bound are more limited.

Number two, you also have some consequences for the economy. I think one of the things that makes me less happy is the fact that the crisis was really about debtors. And then the monetary policy response has really been hard on savers. So getting out of the zero lower bound would also be a good thing for savers. So I think my view is I want to get off the zero lower bound as soon as I think it's appropriate because I think being there is just uncomfortable. And I think it's also it would be nice to actually for savers actually to get a positive return.

I see the decline in mandate-consistent real interest rates as grounded in an increase in the demand for, and a fall in the supply of, safe financial investment vehicles. Importantly, I see these changes as likely to be highly persistent.
There are many factors underlying the increased demand for safe assets. I’ll discuss three that strike me as particularly important: tighter credit access, heightened perceptions of macroeconomic risk and increased uncertainty about federal fiscal policy.

In terms of credit access, I don’t think that it’s controversial to say that credit access is more limited than in 2007. What is less generally realized, I think, is that restrictions on households’ and businesses’ ability to borrow typically lead them to spend less and save more.

I can best illustrate this point through an example. Consider a household that wants to purchase a new home. In 2007, that household could have received a mortgage with a down payment of 10 percent of the purchase price, or even lower. In 2014, that same household is considerably more likely to need a down payment of 20 percent. These tighter mortgage standards mean that, to buy a similarly priced house, the household needs to first acquire more assets.

Thus, the demand for safe assets has risen because of tighter limits on credit access. It has also risen because of households’ and businesses’ assessments of macroeconomic risk… [I]n the wake of the Great Recession and the Not-So-Great Recovery, the story is different. Now, more workers see themselves as being exposed to the risk of persistent deterioration in labor incomes. More businesses see themselves as being exposed to the risk of a radical and persistent downshift in the demand for their products. These workers and businesses have an incentive to accumulate more safe assets as a way to self-insure against this enhanced macroeconomic risk.

The federal fiscal situation is the third key source of elevated uncertainty. The federal government faces a long-run disconnect between its overt commitments and the baseline path of federal tax collections. This disconnect can only be resolved by raising taxes and/or cutting the long-run arc of spending… The prospect of reductions in Medicare, Medicaid or Social Security gives some households an incentive to demand more safe assets as a way of replacing those lost potential benefits.

I’ve argued that, due in part to tighter credit access and higher uncertainty, the demand for safe financial assets has risen since 2007. At the same time, the global supply of assets perceived as safe has also fallen. Americans—and many others around the world—thought in 2007 that it was highly unlikely that American residential land, and assets backed by land, could ever fall in value by 30 percent. Not anymore. Similarly, investors around the world viewed all forms of European sovereign debt as a safe investment. Not anymore.

Thus, the FOMC is confronted with a greater demand for safe assets and tighter supply of safe assets than in 2007. These changes in asset markets mean that, at any given level of real interest rates, households and businesses spend less. Their decline in spending pushes down on both prices and employment. As a result, the FOMC has to lower the real interest rate to achieve its objectives.2

I often hear that the FOMC has created a low interest rate environment that is harmful for savers and others. In my view, like savers, the FOMC is being forced to make unusual decisions by an unusual economic environment that is not of its own making. The FOMC has been confronted with a significant increase in safe asset demand and a significant fall in safe asset supply. Faced with these changes, the Committee can only achieve its macroeconomic objectives by taking actions to push down the real interest rate. Indeed, as I argued earlier, the subdued outlook for prices and employment suggests that the FOMC’s actions have not lowered the real interest rate sufficiently.

What about the future? The passage of time will ameliorate these changes in the demand for and supply of safe assets—but only partially. Any long-run forecast has enormous attendant uncertainties. But I expect that for a considerable period of time—possibly the next five years or more—credit market access will remain limited relative to what borrowers had available in 2007. I expect that many workers and businesses will remain more concerned than in 2007 about the risk of a large adverse shock. And I also expect that businesses will continue to feel a heightened degree of uncertainty about taxes and households will continue to feel a heightened degree of uncertainty about the level of federal government benefits. These considerations suggest that, for many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals. I see this conclusion as broadly consistent with the April FOMC statement, which predicts that the target fed funds rate will remain low for some time after inflation and employment are near mandate-consistent levels.

[S]avers often wear many economic hats. Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and--through pension funds and 401(k) accounts--they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

But if I were bound and determined to address the concerns that savers are being disadvantaged by low interest rates, there are three prescriptions that I could imagine undertaking. And let me tell you, two of them are bad.

First, the FOMC could immediately undertake a program to raise short-term interest rates. In other words, monetary policy could exogenously turn more restrictive. Would this help savers and the economy? In my judgment, that would be a very bad policy. More restrictive credit would further reduce investment and job creation and limit the supply of credit to small business entrepreneurs, resulting in growth even slower than it is now. Savers would not be left with higher returns. And savers’ other sources of income would be reduced, like employment and entrepreneurial income. I have few doubts that policy would need to quickly retrace such a misguided increase.

Alternatively, the FOMC could decide to undertake expansionary policies to the point of “recklessness” by pursuing an extremely high rate of inflation. Persistently higher rates of inflation—outside of reasonable tolerance bands around our long-run inflation objective—would indeed lead to higher interest rates for all. Savers would receive higher nominal interest income; but as Chairman Bernanke said recently, the FOMC would clearly view this as reckless and would not choose to pursue such a policy. Again, this is a case where higher nominal interest rates would be bad for savers and the entire public.

But third, if the FOMC and other policymakers could engineer stronger growth policies so that the economy boomed again and unemployment fell, this would organically lead to higher real rates of return on investment and higher interest rates in general, which would benefit savers and the entire public. A more vibrant economy would benefit owners of unused resources, like unused factory capacity and unemployed workers. This is the policy path that is most desirable in my opinion. I also think it is most consistent with the accommodative policies I have been advocating.

QUESTION: Can you talk about what impact you've seen from Operation Twist on longer term CD rates and investment group bond yields? And do you have any message for people who are relying on those kind of instruments for income?

BERNANKE: Sure.

It's a little bit early to fully assess the effects of what we call the maturity extension program, but it doesn't seem to be -- it does seem to be having, at least in a preliminary sense, it does seem to be having the intended effect of lowering longer term interest rates or -- and -- and twisting the yield curve as -- as was anticipated.  That, in turn, should lead to still lower mortgage rates and other interest rates, which are relevant to the economy.

We are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people. They have costs for savers. We have complaints from banks that complain that their net interest margins are affected by low interest rates. Pension funds will be affected if that -- if low interest rates for a protracted period require them to make larger contributions.  So we're aware of those concerns and we take them very seriously.

I think the response is, though, that there is a greater good here which is the health and recovery of the U.S. economy. And for that purpose we've been keeping monetary policy conditions accommodative, trying to support the recovery, trying to support job creation.

After all, savers are not going to get very good returns in an economy which is in a deep recession. I mean, ultimately if you want to earn money on your investments you have to invest in an -- in an economy which is growing.

And so we believe that our policy will ultimately benefit not just workers and firms and households in general, but will benefit savers as well, as the returns that they can earn on their investments will improve with the improvement in the economy.

I was also concerned that just by tweaking the language the way the committee did, our action might be interpreted as encouraging the view that there is an FOMC so-called “Bernanke put” that would be too easily activated in response to a reversal in the financial markets.

My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors. I believe my FOMC colleagues share this view.

Various objections have been raised to a two-year quasi-commitment to holding the funds rate so low {including} that it would benefit large borrowers at the expense of savers…

Lacker acknowledged those potential costs, but indicated those are not his primary concerns. The trade-off between savers and borrowers is “always part of the mix when we change policy and change the interest rate trajectory,” he said.’

The Fed’s interventions to drive interest rates to historically low levels resulted in significant capital gains for bondholders and equity investors in the most plain-vanilla securities and mutual funds. Yet, by taking interest rates to zero and making money cheap and abundant so as to reliquefy the economy, those who invested the most conservatively―tucking their savings away in the safest of vehicles, like CDs, money market funds, and Treasury bills and notes―saw the income earned on their hard-earned savings dramatically reduced.

I personally fret over these and other costs, but on net, I believe the Federal Reserve did what is expected of a responsible central bank: We stemmed a panic and averted a depression.

Well, I think the judgment has been-- and the reason policy has been what it is is that judgment has been that for the sake of the economy as a whole that we're willing to tolerate if you will, that. But it's certainly true that low interest rates of close to zero are punishing savers, there's no question to that. But that-- the idea policy of that is to sort of get people to quit saving and start spending. So that's kind of one of the objectives.

But it is, the people who are on fixed incomes-- I think there are some real risks that-- if they can't get a return on their savings they start liquidating their assets, liquidating their wealth in order to live. Well, that means that in future generations who would have inherited some of that wealth from their parents let's say, aren't going to get it, it's going to be gone.

STEVE LIESMAN: There's a lot of talk about the distortions that out there that Fed policy is really punishing savers. Do you agree with that and is it something that you think is useful or warranted for the overall health of the economy?

CHARLES PLOSSER: Well, I think the judgment has been-- and the reason policy has been what it is is that judgment has been that for the sake of the economy as a whole that we're willing to tolerate if you will, that. But it's certainly true that low interest rates of close to zero are punishing savers, there's no question to that. But that-- the idea policy of that is to sort of get people to quit saving and start spending. So that's kind of one of the objectives.

But it is, the people who are on fixed incomes-- I think there are some real risks that-- if they can't get a return on their savings they start liquidating their assets, liquidating their wealth in order to live. Well, that means that in future generations who would have inherited some of that wealth from their parents let's say, aren't going to get it, it's going to be gone.

STEVE LIESMAN: I've also had portfolio managers complain to me about the Federal Reserves saying, "You're forcing me into a risk profile I do not want to be in." How do you respond to that?

CHARLES PLOSSER: Well, I think there's some cases where that's probably true. I've talked to money managers and financial managers and private equity people in the financial markets. And a lot of them do share the view that somehow in the stretch for yield many people are taking unwise risks. Now, of course the Fed has made it very clear that at times we're trying to force people to take some more risk, but we can't control how that happens.

And so by trying to push people into riskier assets as we're trying to do with Operation Twist or with an Asset Purchase Programs, we don't know the full consequence with that. And we could, could-- I don't want to say we are, we could be breeding some problems for us down the road if we don't exit in the right time. And then we go past the exit and we have another credit bubble of some kind.