Bernanke Starts New Role As Yellen Takes Fed Helm

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DealBook: Judge Says Bernanke Should Testify in A.I.G. Case

Same Script by Bernanke, but Like a Farewell Scene

Mr. Bernanke, appearing before the Senate one day after he testified before the House, largely repeated the themes and often the words of Wednesday’s testimony.

He said that the Fed had not slackened in its commitment to stimulate the economy — it will cut back only if the economy is making progress. He chastised Congress, saying it was impeding economic growth. And he demurred from talking about his own future, choosing instead to listen quietly as senator after senator treated the hearing like a goodbye party.

This may have been Mr. Bernanke’s final appearance before Congress as Fed chairman. It is widely expected that he will step down in January.

His last decision is when the Fed should begin to reduce its stimulus efforts. The Fed is buying $85 billion a month in Treasuries and mortgage-backed securities.

Mr. Bernanke said on Thursday that the Fed had concluded that such purchases, aimed at reducing long-term interest rates, do less to bolster the economy than the Fed’s traditional focus on reducing short-term rates. He also suggested that in announcing a timeline for tapering last month, the Fed had succeeded in tempering risk-taking in financial markets.

But he once again resisted the idea that the Fed was lowering its sights.

“Isn’t it still way too soon to consider any kind of policy tightening?” Senator Robert Menendez of New Jersey asked Mr. Bernanke, citing the persistently high level of unemployment and the absence of inflationary pressures.

Mr. Bernanke responded that the Fed was changing its approach, not its goals. In testimony, he underscored that the central bank had other tools at its disposal, besides asset purchases.

“I think that we will be able to maintain that high level of accommodation ultimately through rate policy and, you know — and by holding a very large balance sheet,” he said.

Some economists, including Adam S. Posen, president of the Peterson Institute for International Economics, argue that the Fed is making the wrong choice. Mr. Posen describes the Fed’s statements about its plans to hold down interest rates as “cheap talk,” and says it should continue with bond-buying instead.

A further complication for the Fed is that Mr. Bernanke’s likely departure is beginning to erode his credibility as a spokesman about the Fed’s future plans.

Mr. Bernanke has said that the Fed expects to reduce its bond-buying later this year, and to end purchases by the middle of next year, as long as economic growth remains “broadly” in line with the Fed’s expectations.

“We have given some fairly specific qualitative guidance about what we’re looking for,” he said Thursday. Specifically, the Fed wants the unemployment rate to decline from the current rate of 7.6 percent to a rate “in the general vicinity of 7 percent with inflation moving back toward this 2 percent objective.”

The Fed, however, has not included that guidance in its policy statements. And an account of the most recent meeting of the Federal Open Market Committee noted that “about half” of the 19 officials who participated said before the meeting that they expected to end asset purchases by the end of this year.

Senator Charles E. Schumer, Democrat of New York, asked Mr. Bernanke about the apparent disagreement over the question of how much longer the Fed should continue its current bond-buying campaign.

“There seems to be some disparity between the other members and you, and if you’re not there come next year, there’s a worry there,” Mr. Schumer said. “Do they think unemployment will be 7 percent this year, or do they have different assessments about the relative cost and benefit of” quantitative easing?

Mr. Bernanke responded that officials had various reasons for their views. Some regard asset purchases as ineffective, while others may be more optimistic about the economy. But he added that the committee had “a very careful discussion” that led to his public statement about the probable timetable for tapering.

“The general scenario which I described in my press conference is broadly supported by people on the committee and including both voters and nonvoters,” he said.

High & Low Finance: The Time Bernanke Got It Wrong

You could see that this week when Ben S. Bernanke, the Fed chairman, made his semiannual pilgrimage to Capitol Hill to discuss the state of the economy. Lawmakers voiced concern about possibly excessive regulation of banks, but not about the clearly inadequate capital the big banks — and many small ones — had before the crisis.

Some of them seemed to be upset that the Fed’s policies had caused stock prices to rise. Jeb Hensarling, the Texas Republican who is chairman of the House Financial Services Committee, seemed to think that all current economic problems could be traced to President Obama’s excessive spending.

He was upset that the “Federal Reserve has regrettably, in many ways, enabled this failed economic policy through a program of risky and unprecedented asset purchases.”

Mr. Bernanke, who is probably nearing the end of his tenure running the Fed, seemed to have had such criticisms in mind last week when he assessed “the first 100 years of the Federal Reserve” at a conference in Cambridge, Mass.

In analyzing the Fed’s failures during the Depression, he seemed to be taking clear aim at some of his current critics — and perhaps at other central banks that were far less aggressive after the credit crisis.

First, he appeared to address the idea, popular in some circles, that we need a new gold standard.

“The degree to which the gold standard actually constrained U.S. monetary policy during the early 1930s is debated,” he said, “but the gold standard philosophy clearly did not encourage the sort of highly expansionary policies that were needed.” He said policy makers, following flawed economic theories, concluded “on the basis of low nominal interest rates and low borrowings from the Fed that monetary policy was appropriately supportive and that further actions would be fruitless.”

Was that a criticism of the European Central Bank under Jean-Claude Trichet, which lowered interest rates but did little else as the euro zone crisis grew? It certainly helped to explain why Mr. Bernanke felt the need to embark on quantitative easing and to focus on longer-term interest rates as well as short-term ones.

Then Mr. Bernanke pointed to “another counterproductive doctrine: the so-called liquidationist view, that depressions perform a necessary cleansing function.” That was the view pushed in the early 1930s by Andrew Mellon, the Treasury secretary, to such an extent that it angered even President Herbert Hoover, who did not, however, seem to think he could overrule the secretary. Now the comments could be read as a reproach to those, in the United States and Europe, who push for austerity above all else.

“It may be that the Federal Reserve suffered less from lack of leadership in the 1930s than from the lack of an intellectual framework for understanding what was happening and what needed to be done,” Mr. Bernanke concluded.

It seems to me that something similar could be said for the Fed before the debt crisis erupted. The intellectual framework it used simply could not cope with the idea that financial stability can itself become a destabilizing factor, as investors and bankers conclude that it is safe to take on more and more risk.

For a time, the period before the collapse was known as the “Great Moderation,” a term that Mr. Bernanke helped to publicize in a 2004 speech. Low levels of inflation, long periods of economic growth and low levels of employment volatility were viewed as unquestioned proof of success.

And what brought on that success? In 2004, Mr. Bernanke, then a Fed governor, conceded good luck might have helped, but his view was that “improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

In 2005, three Fed economists, Karen E. Dynan, Douglas W. Elmendorf and Daniel E. Sichel, proposed an additional explanation for the Great Moderation: the success of financial innovation.

“Improved assessment and pricing of risk, expanded lending to households without strong collateral, more widespread securitization of loans, and the development of markets for riskier corporate debt have enhanced the ability of households and businesses to borrow funds,” they wrote. “Greater use of credit could foster a reduction in economic volatility by lessening the sensitivity of household and business spending to downturns in income and cash flow.”

Floyd Norris writes on finance and the economy at nytimes.com/economix.

Your Money: Taking a Cue From Bernanke a Little Too Far

You can hardly blame them. Investors have been fleeing bonds in droves; a record $76.5 billion poured out of bond funds and exchange-traded funds during the month of June through Wednesday. That exceeds the previous record, according to TrimTabs, when $41.8 billion streamed out of the funds in October 2008 and the financial crisis was in full force.

But the rush for the exits really means one thing: investors are betting that interest rates are about to begin their upward trajectory, something that’s been expected for several years now.

Their cue came from the Federal Reserve chairman, Ben Bernanke, who recently suggested that the economic recovery might allow the central bank to ease its efforts to stimulate the economy. That includes scaling back its bond-buying program beginning later this year.

So the big fear is that interest rates are poised to rise much further, driving down bond prices; the two move in opposite directions.

A Barclays index tracking a broad swath of investment-grade bonds lost 3.77 percent from the beginning of May through Thursday, according to Morningstar. United States government notes with maturities of 10 years or longer, however, lost an average of 10.8 percent over the same period.

Making a bet on interest rates is no different from trying to predict the next big drop in stocks, or jumping into the market when it appears to be poised to surge higher. These sort of emotional moves are exactly why research shows that investors’ returns tend to trail the broader market.

And it’s also why many financial advisers suggest ignoring the noise, as long as you have a smart assortment of bond funds that will provide stability when stocks inevitably tumble once again.

“It’s a futile game to base portfolio moves on interest rate guesses,” said Milo Benningfield, a financial adviser in San Francisco. “We don’t have to look any further than highly regarded Pimco manager Bill Gross, whose horrible interest rate bet against Treasuries in 2011 landed him in the bottom 15 percent of fund managers in his category that year. Investors should take a strategic approach designed around the reason they hold bonds — and then sit tight whenever hedge funds and other institutions shake the ground around them.”

The main reason longer-term investors hold bonds, of course, is to provide a steadying force. And though today’s lower yields provide less of a cushion — the 10-year Treasury is yielding about 2.5 percent — bonds still remain the best, if imperfect, foil to stocks.

“The role of bonds in a portfolio has always been to be a ballast or a diversifier to equity risk,” said Francis Kinniry, a principal in the Vanguard Investment Strategy Group. “And that is very true today. Yields are low, but this is what a bear market in bonds looks like.”

So, yes, losses are indeed more probable than they have been in recent years. From 1976 through Jan. 31, 2013, high-quality bonds yielded an average of 7.3 percent, according to a recent Vanguard , which provided a nice cushion. For instance, if you had a portfolio of 60 percent stocks and 40 percent bonds — and stocks fell by 20 percent — the overall portfolio would have lost 9.1 percent. If the market plummeted 40 percent, the entire pile of money would be worth 21 percent less.

The situation is a bit different now. Assuming a more conservative average return on bonds of 1.9 percent — a reasonable estimate based on bond yields now, according to Vanguard — the same 20 percent drop in the stock market would cause the overall portfolio to decline by about two percentage points more, or 11.2 percent. If the market plummeted by 40 percent, the portfolio would lose 23 percent.

“Investors have been conditioned by higher bond yields going into both bear markets in the last decade to believe that bonds will substantially offset stock declines,” Mr. Benningfield added.

So perhaps the loss from the bonds somehow feels worse because it’s not something investors are accustomed to. And the memories of the stock market collapse of 2008-9 are still fresh enough.

“People are using adjectives like ‘blood bath’ and ‘devastation,’ but we are talking about a negative 3 percent return,” said Mr. Kinniry, referring to the Vanguard Total Bond Market Index fund, which is down by that amount year-to-date.

Even the big bond market sell-off in 1994, which many refer to as a “massacre,” doesn’t seem quite as violent as that moniker suggests. As Mr. Kinniry points out, the same index fund lost 5.3 percent that year, after interest rates spiked by 2.83 percent. If the same sort of situation were to play out now, he said the returns would be significantly worse because bond yields are lower than they were back then. “You might lose about 8 percent,” he said, adding that losses could be deeper depending on how quickly rates rose, among other factors. But typically, “we’re talking about single-digit losses.”

Still, some advisers suggested taking a closer look at your overall allocation to stocks, particularly if you’re not well diversified, since bonds will provide less protection.

For most investors, holding bonds through low-cost index funds remains the most prudent course. People who invest in individual bonds don’t have to worry about fluctuations in their price because they can continue to hold the bond and collect their interest payments until maturity, at which point they’ll collect its face value (unless, of course, the bond issuer defaults). But you need to have a good pile of cash — some experts say $500,000, even more — to assemble a diversified portfolio of municipal and corporate bonds (though you don’t need quite as much for Treasuries, since they’re backed by the government).

You can figure out how sensitive your fund is to interest rates by looking at its duration, which essentially measures how long it will take to receive all of your money back, on average, from interest and your original investment. Generally speaking, for every percentage point that interest rates rise (or fall), a bond’s value will decline (or increase) by its duration, which is stated in years. Bond funds with shorter durations are less susceptible to interest rate risk — the faster a bond matures, the thinking goes, the more quickly you can reinvest the money at a higher interest rate.

That means a fund like the Vanguard Total Bond Market Index fund, which has a duration of 5.5 years, would decline by about 5.5 percent. But since the fund also pays investors income — it has a yield of about 1.7 percent — it would actually only post a total loss of about 3.8 percent. (Future returns would be one percentage point higher, too, thanks to the rise in rates).

But if even that feels too risky, experts say you can put some of your bond money into a diversified index fund with an even shorter duration. The trade-off, of course, is that you will earn less income. That might not matter once you remind yourself why you own bonds at all.

News Analysis: When Bernanke Confounds, Wall Street Reaches for Theories

Alex Wong/Getty ImagesBen Bernanke’s comment in testimony before Congress last month has Wall Street buzzing about its meaning.

Amid the current turmoil in global markets, one question is being obsessively debated on Wall Street: Just what was Ben S. Bernanke thinking three weeks ago when he said that the Federal Reserve might soon cut back its stimulus efforts?

While second-guessing the Fed is a parlor game that traders have played for decades, it is an exercise that has taken on heightened significance. That is because in recent years, the markets have been more dependent on central bank support than at than any time in recent memory. So when Mr. Bernanke, the Fed chairman, said that the stimulus might diminish, alarm was bound to spread. And quite a reaction it was.

Since May 22, when Mr. Bernanke made those remarks, global stock markets have lost $3 trillion in value, according to Bank of America Merrill Lynch.

The Japanese stock market, for example, lurched into bear-market territory on Thursday after a tumble of 6.4 percent took the cumulative decline in the Nikkei 225 index to more than 21 percent since a peak on May 22.

While sentiment has been fragile as investors have taken stock of the economic policies of Prime Minister Shinzo Abe, markets in Europe and the United States have been volatile as well. Stocks rallied in the United States on Thursday, with the Standard & Poor’s 500-stock index rising 1.5 percent, but they have gyrated since Mr. Bernanke’s remarks forced investors to consider a world with less Fed stimulus.

Mr. Bernanke will get another bite at the apple at a scheduled news conference next week and in his semiannual testimony to Congress next month, when his comments will be closely scrutinized.

Before looking at what Mr. Bernanke actually said in May, it is helpful to recall some history.

Kimimasa Mayama/European Pressphoto AgencyWorkers at the Tokyo Stock Exchange checked trades after the closing on Thursday, when the Nikkei tumbled 6.4 percent.

After the financial crisis of 2008, the Fed moved into emergency mode to lift the economy and support the banking system. The central bank has bought more than $2 trillion of bonds, effectively pumping that amount into the banking system and economy.

The Fed’s latest bond purchase program kicked in this year. But in contrast to its previous programs, the Fed this time did not say in advance how much it was going to spend on bonds. Instead, the central bank said it would keep up its purchases until certain economic targets were achieved.

The main goal is to get the unemployment rate down to 6.5 percent or lower. The Fed is also watching the falling inflation rate and will keep buying bonds if that indicator falls to a level that it thinks will weaken the economy and financial system.

Looking at where those two gauges are today, investors assumed the Fed would buy bonds for many months. But that changed when Mr. Bernanke testified before Congress on May 22. He said that if the Fed saw improvement in the economy, and felt it could be sustained, it “could in the next few meetings take a step down in our pace of purchases.”

The words “next few meetings” were what really worried market participants. They had become accustomed to the Fed’s implacable reassurances that it wasn’t going to change its accommodative stance until the goals had been met.

Yet here was Mr. Bernanke seemingly saying that the money spigot could start closing later this year. Their thought process continued: Mr. Bernanke must know how much weight his words carry, and he always speaks very carefully to avoid upsetting the apple cart, so his utterance must have been deliberate and must have had a motive.

Here are four theories going around Wall Street on why the Fed chairman said what he said:

A BONE FOR THE HAWKS

According to Fed observers, Mr. Bernanke has a consensual style of management on the all-important Fed committee that sets monetary policy. Some members have deep reservations about the large bond purchases. Mr. Bernanke doesn’t agree with the hawks, but he wants them to feel that their concerns are listened to.

So he makes an utterance that proves to them that he is not afraid to publicly envision a definite end to the stimulus. They then feel comforted that Helicopter Ben will have the resolve to stop the money drop — one day. This theory is great for the camp that thinks the Fed must keep pressing the gas. It means Mr. Bernanke was merely being a shrewd manager and isn’t going to turn stingy any time soon.

BURSTING BUBBLES

The Fed has a frighteningly poor record of spotting bubbles and deflating them before they become destructive. There is no gigantic, overarching bubble right now that could harm the wider economy. But over the last two years, as the Fed has pumped money into the financial system, large markets have been driven higher by significant amounts of speculation.

A Fed governor, Jeremy C. Stein, has highlighted the risks in some of them. On Wall Street, with interest rates this low for so long, it has become easy to make bets with borrowed money. But such investments can unwind violently with even the slightest tightening of credit. Mr. Bernanke may have wanted to throw a little bit of sand into this giant leverage machine.

If so, it seems to have worked so far, because some of the frothiest markets have tumbled since his testimony. From the Fed’s perspective, the risk is that the sell-off builds on itself and weighs on the wider economy.

DRESS REHEARSAL

One day the Fed will clearly state that it truly is going to pare its purchases. That could usher in a turbulent period in the markets. Talking about such withdrawal today could soften any shock it inflicts on the market when it happens. It is the same reason parents prepare children for their first day of school during the summer.

“You could see this as a trial balloon that was floated,” said Brian Smith, who trades bonds at TCW, an asset management firm. “Bernanke might have wanted to see if the market could handle a tapering.”

The Fed also gets to examine exactly how the markets reacted and can make tailored responses. In recent weeks, some important assets have been acting in weirdly interconnected ways (just search Google for the term “convexity vortex”). The Fed is now wiser about those sorts of moves.

A TAP ON THE BRAKES

The final theory is that Mr. Bernanke has in fact shifted his stance. While certainly not a hawk, he has intellectually moved closer to ending the asset purchases than people might realize. It is important to remember that the latest open-ended program was conceived at the end of last year, when there was great trepidation about the drag that fiscal retrenchment would have on the economy.

“Back in December, the Fed didn’t know if we would fall off the fiscal cliff,” said David Rosenberg, chief economist at Gluskin Sheff & Associates. “So it may have thought, ‘We’ll shoot now and think later.’ ”

It turns out that, in spite of Washington’s budget battles, the economy has been quite resilient. For the economic conditions that exist right now, smaller purchases may be more appropriate. Some economists dispute this line of thinking.

For instance, they say the Fed isn’t going to taper when the inflation rate is declining as it is right now. But Mr. Bernanke may think that dip is temporary, particularly since some forward-looking indicators in the markets predict a rise in inflation. And some economists see strong signs that the latest round of bond purchases is having its desired effect and will lead to a stronger economy as early as the second half of this year.

When faced with frantic speculation over its motives, and weakening markets, the Fed may be tempted to say things to calm everyone down. So far, the most influential Fed governors have not come out to somehow correct people’s interpretations of Mr. Bernanke’s remarks. That could work to the good of everyone.

“Although the last three weeks have been jarring to everyone — including the Fed — its prime directive is to get policy correct, not worry about several weeks of increased market volatility,” said Jim Vogel, a debt markets strategist for FTN Financial.

Wall Street Jumps as Bernanke Testifies

The Standard & Poor’s 500-stock index posted its biggest decline in three weeks on Wednesday after minutes from the latest Federal Reserve policy meeting showed that some officials were open to cutting back on large-scale asset purchases as early as the June meeting.

The Dow Jones industrial average and the Nasdaq index also declined. Trading was volatile, with the Dow and the S.& P. rising in the morning, but falling in the afternoon.

The Fed minutes were released after comments from Ben S. Bernanke, the chairman, who said the Fed could decide to scale back the pace of bond purchases at one of the “next few meetings” if the recovery looked as if it would maintain positive momentum.

The comments were a blow to a market that had accelerated after Mr. Bernanke said the central bank needed to see further signs of traction in the economy before it trimmed back the stimulus.

“This is a very sensitive market and particularly sensitive to any notion that tapering will come too soon,” said Quincy Krosby, market strategist at Prudential Financial in New York.

“No one wants to be selling if the data reaches the point when the Fed begins to specifically talk about tapering. The market doesn’t wait for the Fed to move. It will move before. That’s how it operates.”

Ms. Krosby added that Mr. Bernanke went off script and, in his effort to be transparent, “he confused the market.”

According to the minutes of the April 30 to May 1 policy meeting, which were released on Wednesday, “a number” of officials were open to reducing large-scale asset purchases as early as the June meeting, but disagreement continued on what conditions would suffice to begin that move.

Investors have increasingly turned their attention to when the Fed’s $85 billion monthly bond purchase program might end or slow. The stimulus has been a major force behind a rally in United States equities that has helped the S.& P. 500 and the Dow industrials to double-digit gains.

The Dow Jones industrial average was down 80.41 points, or 0.52 percent, at 15,307.17. The S.& P. 500 was down 13.81 points, or 0.83 percent, at 1,655.35. The Nasdaq composite index was down 38.82 points, or 1.11 percent, at 3,463.30.

The S.& P. 500 rose as high as 1,687.18 and fell as low as 1,648.86 in Wednesday’s trading session while the Dow rose as high as 15,542.40 and fell as low as 15,265.96.

The price of the benchmark 10-year Treasury note fell 30/32, to 97 14/32, and the yield rose to 2.04 from 1.93 on Tuesday.

Fed Stimulus Still Needed to Help Recovery, Bernanke Says

While acknowledging the risks of historically low interest rates and the Fed’s aggressive policy of buying government bonds to help stimulate the economy, Mr. Bernanke said in testimony that “a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.”

After his opening statement, however, Mr. Bernanke seemingly opened the door a bit wider to tapering down.

Under questioning by Representative Kevin Brady, a Texas Republican who chairs the Joint Economic Committee, Mr. Bernanke said the Fed could prepare to “take a step down” in the next few meetings if the outlook for the labor market improved.

“It’s dependent on the data,” he said. “If the outlook for the labor market improves, we would respond to that.”

Mr. Brady asked if the tapering could begin before Labor Day, prompting Mr. Bernanke to say, “I don’t know.”

“We are buying a certain amount of assets each month,” he continued. “We are looking for increased confidence and in steps respond to that.”

According to a summary of the Fed’s last Open Market Committee meeting released Wednesday afternoon, Fed policy makers were still tentative about dialing back on their efforts to boost growth at their session on April 30 and May 1.

“A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth,” the minutes of the meeting stated. However, views differed on just what that evidence would be and whether a tapering was indeed likely.

While “a few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September,” others members of the panel were less convinced, according to the minutes.

“In contrast, a few other members focused on evidence that market expectations about the total size of the program had changed little,” the record showed.

While there was no clear consensus on policy, most members agreed on the need “to communicate clearly that the pace and ultimate size of its asset purchases,” would depend on outlook for the economy, a stance echoed by Mr. Bernanke in his testimony earlier the day.

In his opening statement, Mr. Bernanke said that since last summer, “financial conditions in the euro area have improved somewhat,” helping lessen the headwinds faced by the American economy as well.

He noted that the federal government’s fiscal policy had become “significantly more restrictive,” even as the Fed had pursued a looser monetary policy. The expiration of the payroll tax reduction in January and tax increases, as well as automatic spending cuts imposed by Congress and lower military spending, will collectively “exert a substantial drag on the economy this year.”

Speculation had been rising in recent weeks that the Fed might be preparing to taper its bond purchases, which total $85 billion a month. The bond-buying program has been credited with increasing growth, but some observers worry it could create a bubble in the prices of assets like stocks.

At its most recent meeting this month, the Fed said it was “prepared to increase or reduce the pace of its asset purchases,” prompting some analysts to speculate that bond purchases might be reduced in the coming months.

“In considering whether a recalibration of the pace of its purchases is warranted,” Mr. Bernanke told the Joint Economic Committee, the Fed “will continue to assess the degree of progress made toward its objectives in light of incoming information.”

Stocks on Wall Street surged after Mr. Bernanke’s remarks but pulled back in afternoon trading.

This article has been revised to reflect the following correction:

Correction: May 22, 2013

An earlier version of this article incorrectly described the timing given by Mr. Bernanke of a potential Fed move. He said the Fed could prepare to “take a step down” in the next few meetings, not the next few weeks.

This article has been revised to reflect the following correction:

Correction: May 22, 2013

Economix Blog: Bernanke Says Better Days Lie Ahead

Ben S. Bernanke is, of course, the chairman of the Federal Reserve, but he always seems most comfortable as an educator, a role he slips into for a commencement address on Saturday at Bard College at Simon’s Rock.

If you’re looking for news about monetary policy, read no further. Mr. Bernanke’s speech mentions not a word about his day job. (In 2009, he opened a commencement address by saying, “The business reporters should go get coffee or something, because I am not going to say anything about the markets or monetary policy.” This time, we had to read the whole thing to make sure that no hint of news was buried inside.)

No doubt the graduating class will be much relieved to have avoided a modern version of Paul Volcker’s commencement address at American University in 1984, dug up by Catherine Hollander of National Journal. One can only imagine the faces in that audience as Mr. Volcker announced, “I’d like to take advantage of your captive presence today, before you scatter into the real world, to reflect a bit on that uniqueness, on the justification for our special role and degree of independence within the government, and on the special responsibilities that independence implies.”

What Mr. Bernanke’s speech delivers, instead, is a brief and engaging sketch of the debate about the state of innovation.

Economic growth depends on innovation, and some see evidence we’re having less of it — or at least that the areas of ongoing innovation, like information technology, are making less difference in our lives. The economist Robert Gordon wrote last year that we’re no longer inventing anything as useful as indoor flushable toilets. The economist Tyler Cowen offered a fluid account of the same basic argument in a brief, important book with a long title: “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick and Will (Eventually) Feel Better.”

Mr. Bernanke, describing this argument, compares the present moment with life in 1963, when he was 9 years old. “Though my memory may be selective, it doesn’t seem to me that the differences in daily life between then and now are all that large,” he says in the prepared text of the speech. “Heating, air conditioning, cooking, and sanitation in my childhood were not all that different from today. We had a dishwasher, a washing machine and a dryer. My family owned a comfortable car with air-conditioning and a radio, and the experience of commercial flight was much like today but without the long security lines. For entertainment, we did not have the Internet or video games, as I mentioned, but we had plenty of books, radio, musical recordings, and a color TV (although, I must acknowledge, the colors were garish and there were many fewer channels to choose from).”

But the real concern is about the future: What if life continues to resemble 1963? What if the Internet doesn’t change the world?

And on this count, Mr. Bernanke breaks with the bleak traditions of his dismal profession to declare himself a fundamental optimist.

He notes that pessimism also ran rampant in the 1930s; it is human nature to assume (and to predict) that current trends will persist. “It is common to hear people say that the epoch of enormous economic progress which characterized the 19th century is over; that the rapid improvement in the standard of life is now going to slow down,” John Maynard Keynes wrote at the time. Mr. Bernanke adds, “Sound familiar?”

Moreover, he says it is probably too soon to judge the impact of recent innovations.

And he sketches a world in which more people in more countries are pursuing innovations in competition for ever-greater rewards: “In short, both humanity’s capacity to innovate and the incentives to innovate are greater today than at any other time in history.”

So cheer up, graduates! It’s a difficult time to be young but, as this blog notes frequently, you’ve just taken the single most important step to improve your own prospects: You earned a college degree. Now do the rest of us a favor and innovate.

Economix Blog: Bernanke Defends Stimulus as Necessary and Effective

The Federal Reserve’s chairman, Ben S. Bernanke, picked an unusual time to offer his most recent defense of the Fed’s campaign to stimulate the economy: 7 p.m. on a Friday night in San Francisco, 10 p.m. back home on the East Coast.

The basic message was the same as Mr. Bernanke delivered to Congress earlier this week: The Fed regards its current efforts as necessary and effective, and the risks, while real, are under control.

“Commentators have raised two broad concerns surrounding the outlook for long-term rates,” Mr. Bernanke told a conference at the Federal Reserve Bank of San Francisco. “To oversimplify, the first risk is that rates will remain low, and the second is that they will not.”

If rates remain low, it may drive investors to take excessive risks. If rates jump, investors could lose money – not least the Fed.

Regarding the first possibility, Mr. Bernanke said that the Fed was keeping a careful eye on financial markets. But he noted that rates were low in large part because the economy was weak, and that keeping rates low was the best way to encourage stronger growth. “Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading — ironically enough — to an even longer period of low long- term rates,” he said.

At the other extreme, Mr. Bernanke said the Fed could “mitigate” any jump in rates by prolonging its efforts to hold rates down, for example by keeping some of its investments in Treasury and mortgage-backed securities.

Three more highlights from the question-and-answer session after the speech.

1. Mr. Bernanke, asked about the outlook for the Washington Nationals, responded by accurately quoting the “Las Vegas odds” of a World Series appearance: 8/1.

2. Although the decision may be made under a future chairman, Mr. Bernanke said the Fed should continue to offer “forward guidance” — predicting its policies — even after it concludes its long effort to revive the economy.

“Providing information about the future path of policy could be useful, probably would be useful, under even normal circumstances,” he said in response to a question. “I think we need to keep providing information.”

3. Not surprisingly, Mr. Bernanke often is asked to reflect on the financial crisis. He offered something a little different than his normal response on Friday night.

“In many ways, in retrospect, the crisis was a normal crisis,” he said. “It’s just that the intuitional framework in which it occurred was much more complex.”

In other words, there was a panic, and a run, and a collapse – but rather than a run on bank deposits, the run was in the money markets. Improving the stability of those markets is something regulators have yet to accomplish.