So I would say that I spent a lifetime working with financial models and they are essential and get you about 80 percent of the way there, but if you think the models are going to make your decision for you, then you’re not going to get very far in life. So, this was my world in the financial markets for many years, it’s really not that different.

You can’t do anything without modeling it, but at the same time, that last 20 percent of judgment and experience and understanding and risk management, the weighing of risks, is critical.

To get a sense of the views that members of our committee hold, included in the monetary policy report is a summary of economic projections that all participants in the FOMC provided at the beginning of our June meeting. So these projections are just that. They depend on each participant's own personal economic outlook, and they are not a policy statement of the FOMC, but they provide some sense of concretely what participants expected at the beginning of that meeting.

QUESTION: Mr. Chairman, this is the third straight set of economic projections you have released that have downgraded forecasts for growth and for employment. I wonder, is there some systematic error or some blind spot that's -- that's behind these kind of overly optimistic forecasts? What are you doing internally to understand what you got wrong the last few projections?

BERNANKE: Well, it's a perfectly fair question. And, you know, we spend a lot of time reviewing those errors. The staff in particular presents us with information on forecast errors and on revisions, et cetera. And so we look at that very carefully.

I think it's clear that in retrospect that the severity of the financial crisis and a number of other problems, including the dysfunction in the housing market, have been more severe and more persistent than we initially believed. And that together with a number of other phenomena, like deleveraging by the household sector and so on, has slowed the pace of recovery.

So, yes, we have again downgraded the medium-term forecast. Evidently, the forces, you know, the drags on the recovery were stronger than we thought.

I would add, however, though, that although I think it's very important to look at the fundamental factors affecting the recovery, there's been some elements of bad luck. For example, this year the combination of the natural disaster in Japan, which had global impacts in terms of growth, oil price increases, the European debt crisis, which was not anticipated to be as severe and create as much volatility as it has in financial markets, all those things have been negatives for growth. And they do explain at least part of the  downward revision.

Kenneth Arrow, a Nobel Laureate in economics, had his own perspective on forecasting. During World War II, he served as a weather officer in the U.S. Army Air Corps and worked with a team charged with the particularly difficult task of producing month-ahead weather forecasts. As Arrow and his team reviewed these predictions, they confirmed statistically what you and I might just as easily have guessed: The corps’ weather forecasts were no more useful than random rolls of a die. Understandably, the forecasters asked to be relieved of this seemingly futile duty. Arrow’s recollection of his superiors’ response was priceless: “The commanding general is well aware that the forecasts are no good. However, he needs them for planning purposes.”

A huge factor in forecasting next quarter's (gross domestic product) is the last quarter's GDP. Second quarter GDP growth was something like 1.7%. We weren't seeing the same employment gains that we had been seeing in the spring. Those things together made my forecast damp downwards. What we've seen since then is an uptick in GDP growth. We have a lot of the information about what GDP growth is going to look like in the fourth quarter. It looks stronger than it did in the third, and the third was stronger than the second. So these are things that are going to push us towards a better outlook. In terms of 2011, when you just think about the fiscal policy changes that took place in December, I think those are going to be positive for the outlook as well.

I can be reasonably certain of only one point: My economic forecast is highly likely to be wrong--but I don't know how. One implication of this pervasive uncertainty is that any statement about the future path of monetary policy must be conditional--dependent on the economy following the expected path. Although the FOMC has stated that the federal funds rate is likely to remain exceptionally low for an extended period, this statement explicitly depends on an economic outlook similar to the one I have given today. We cannot provide a precise timetable for when short-term interest rates will begin to return to normal because that depends on the evolution of actual and projected activity and inflation.

One implication of this pervasive uncertainty is that any statement about the future path of monetary policy must be conditional--dependent on the economy following the expected path. Although the FOMC has stated that the federal funds rate is likely to remain exceptionally low for an extended period, this statement explicitly depends on an economic outlook similar to the one I have given today. We cannot provide a precise timetable for when short-term interest rates will begin to return to normal because that depends on the evolution of actual and projected activity and inflation.

In my experience, these and other considerations put a premium on flexibility. The need to learn from and respond to news means that policy should have a substantial discretionary component. We have certainly needed to innovate over the past several years to contain the damage from unprecedented events in financial markets. But discretion has its limits as well. We must be able to explain and justify our actions within a coherent framework--even if the elements of that framework are adjusted from time to time as experience dictates. And to the extent that we can act predictably, households and businesses will be able to anticipate our actions, reinforcing their effects. Finally, we must not be flexible about our objectives. The goals of monetary policy--price stability and maximum employment--are stable and well known. The flexibility relates to the actions we take to get there.

I have to say that the continued demand for economists’ forecasts is a little puzzling to me, given our track record. On that note, it’s been said that economists make predictions about gross domestic product to the hundredth decimal point for one reason: to prove that they have a sense of humor. Well, just to assure you that I am taking this all very seriously, I will keep my forecasts to the tenth decimal point.

Normally forecasters are slow to recognize a recovery.  Just as economic models usually do not foresee the depth of economic problems at the onset of a recession, most models miss the speed of the recovery.  Thus, while I do indeed expect the recovery to be slow, I am well aware of the perils in making such a forecast – given the forecast errors often made at this time of the cycle.  Still, while every recession has its unique features, this recession has involved larger impacts on our economic and financial infrastructure than others – a fact that makes my outlook on the speed of this recovery rather subdued.

Economic forecasts—particularly when looked at collectively—provide valuable information for risk managers in their underlying assumptions and their information about the degree of uncertainty in the economic environment. I would argue they are less useful as point predictions of data elements or timing of turning points.

For example, in light of the demonstrated importance to the real economy of speculative booms and busts (which can take years to play out), central banks probably should always try to look out over a long horizon when evaluating the economic outlook and deliberating about the appropriate accompanying path of the policy rate.  The Federal Reserve staff has for sometime regularly provided the FOMC with this sort of extended-horizon analysis.  In particular, the staff regularly generates likely paths for the economy over the next five years or so under different economic and policy assumptions; these scenarios often highlight different possibilities for the evolution of prices for homes and other assets.  Note that the focus here is not a single baseline outlook; rather, the emphasis is on exploring the various ways events could play out and the implications for monetary policy.

As a result, policymakers must look to lessons that are common across alternative specifications and base policy on our current understanding of the most likely important structural factors.  Fortunately, I think that many of the models of nominal price and wage adjustment imply similar conclusions regarding the influence of commodity prices on the inflation outlook and the appropriate response of monetary policy.

In times of economic turbulence and uncertainty, forecasting becomes more difficult. That does not mean that you can stop forecasting, but it does mean that the uncertainty surrounding any forecast will be unusually large.

The economy is clearly anemic. We're going to have a period of substandard growth that'll stretch for a couple of quarters, if not a little bit longer. At the same time, we do have worse numbers than we had before on the inflationary front. It's always dangerous in this business to do what I think is an oxymoronic thing which is instant analysis. You have to really study the entrails of all the new numbers that have come through. I think it's too soon to form a judgment as to whether the economy is indeed weaker than I expected or inflation pressures are worse than I expected. But clearly the numbers that have come through indicate that we're in for a period of prolonged, slow, economic growth

Although the danger is real, it is also true that oil futures prices for contracts several years ahead do not suggest continuing increases in oil prices of the magnitude observed over the past five years. That was also true five years ago—the futures market turned out to be wrong. However, my view is that policymakers should rely on the judgment of the markets unless we have solid evidence that the markets are wrong. My personal experience is that, although the markets obviously can be wrong, I have no confidence that my own judgment on something like oil prices will be systematically more accurate.

Still, without putting too fine a point on it, I would expect economic growth in the long run to average somewhere around 2 ½ percent per year, given my expectations for productivity and for hours. Such a performance is likely to exceed the pace of population increase, implying a further rise in standards of living over time