The following are highlights of Federal Reserve Chairman Ben Bernanke's speech on the economic outlook before the Economic Club of Minnesota on Thursday.


The dollar at this point remains the currency of choice. I suspect that will continue to be the case for some time. A lot of reasons for that, including, again, the underlying strength and vitality of the U.S. economy but also very importantly the size, the depth and the liquidity of our financial markets...

Low inflation domestically doesn't always mean immediately that the foreign exchange value of the dollar will be high or low ... but in the longer term there is in fact a very close connection between our mandate and the value of the dollar. Specifically, in the medium term, the value of the dollar depends basically on two things. It depends on our inflation rate relative to other inflation rates in other countries, and it depends on the strength of our economy.

Again, we've kept inflation low and inflation in the U.S. has been actually lower than most countries in the last couple of years. So, on that count, by keeping inflation low and purchasing power stable, we're going to enhance the dollar. Our policy of trying (to) promote recovery and trying to help the economy get back to a point where it can grow and be strong again that will make the U.S. an attractive destination for investment and that will, you know, be the other half of the equation.

Ultimately, the policy of maximum employment and price stability is consistent with a strong dollar policy.


Well, there's a reason it's a committee. There are 19 people around the table when we meet to discuss monetary policy. And my attitude has always been if two people always agree, one of them is redundant.

So the reason we have a committee is to bring different points of view and different analytical approaches, different perceptions of the economy, different views on communication and on strategy.

And I have always tried -- I think this is the best way to make policy -- I've tried to encourage, both inside and outside, debate and discussion about what is the right approach.

Now, one thing is certainly evident is that currently we are in a situation which in many ways is unprecedented.

The problems afflicting our economy, the nature of monetary policy given that we've already reduced the short-term interest rate close to zero and we've been looking at alternative ways to stimulate the economy, different views on what the problem is in some sense.

So, it's natural to have some disagreement and we have had different points of view. There's obviously no hiding that and I have no desire to hide that.

But again, I think it's ultimately constructive and I encourage debate.


Interestingly, Treasury interest rates are actually lower today than they were before the downgrade, so there has not, so far at least, been a permanent impact on our interest costs although some of the downgrade effects have flowed through to other borrowers besides the U.S. Treasury.

If you listen to what S&P said, they didn't make the claim that the U.S. didn't have the economic resources to pay for its liabilities, we do. It's not a question of economics, we are a very rich country.


We have to do this all in a way that is not disruptive to financial markets, as the discussions over the summer did prove to be. We need a better process so that we don't have the same consequences that we saw with the downgrade and with some of the financial volatility that was associated with the process this summer.

There are a number of countries around the world, Switzerland is one example, where fiscal rules have been put in place and they helped at least provide a framework for policymakers to make good coherent long-term decisions.



In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. My FOMC colleagues and I will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability.


The prospect of an increasing fiscal drag on the economy in the face of an already sluggish recovery highlights one of the many difficult trade-offs currently faced by fiscal policymakers.


We see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy.


In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures. Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation.