EconoMonitor

Peterson Institute for International Economics

Bernanke Did Not Bomb

On Wednesday afternoon, April 27, 2011, Federal Reserve Chairman Ben Bernanke gave the first scheduled press conference by a Federal Reserve chairman immediately following a meeting of the Federal Open Market Committee (FOMC).  Chairman Bernanke was sure footed and appeared not to be surprised by any of the questions. He answered most of the questions directly, although, like any public official, he did not always answer the question precisely and sometimes declined to do so.

The press conference, indeed, was historic. But it was not the first by a Federal Reserve chairman. Paul Volcker had a press conference on October 6, 1979, after the FOMC’s decision on the “New Operating Procedure” designed to defeat inflation. His predecessor Arthur Burns had two press conferences, but they were not post-meeting press conferences and only one was about FOMC policy—on Federal Reserve transparency. Alan Greenspan had several press conferences on trips to Japan in an effort to make sure that the Japanese press correctly interpreted his messages during his visit. However, regularly scheduled post-FOMC press conferences will now be routine—four times a year—and the Federal Reserve cannot easily go back. For the record, toward the end of the period when I was at the Federal Reserve (1972–98), I favored such a policy. I saw it as way to help to get the Federal Reserve’s message across on a consistent basis.  The challenge will be when the FOMC and its chairman want to get out a clear message about a complex change in policy.

The single most important message on April 27 was on inflation.  If the Federal Reserve becomes convinced that inflation in the future is expected to increase significantly (inflation expectations in economist jargon), the FOMC will not hesitate to act even if unemployment is still high, he said. (Presumably how vigorous the action would be would depend in part on the level of unemployment at the time.) Chairman Bernanke also was clear that compared to conditions last fall there is a “narrowing tradeoff” between inflation and unemployment; the risk of deflation is now seen as much lower and the unemployment rate has come down somewhat.

He also argued that the effects of recent increases in energy and food prices are expected to be transitory and not contribute to underlying inflation.  The FOMC’s new forecasts anticipate a sharp rise in the headline inflation rate for personal consumption expenditures (PCE) to 2.1 to 2.8 percent this year, up about a percentage point from the January forecasts. Although by 2013 the current projections converge to the range anticipated three months ago, there is some apparent pass through into the FOMC’s projections of PCE inflation excluding food energy prices of about 3/10 percentage points in 2011 and 2012.

Bernanke gave a spirited defense of the effectiveness of the Federal Reserve’s policy of purchases of long-term US government securities (known as the second quantitative easing or QE2). He argued that it has been effective in stimulating the economy, as had been expected. He sought to reassure markets that when the purchase program comes to an end at the end of June there will be minimal effects on interest rates and financial market conditions because the action has been anticipated and the effect on interest rates and other financial conditions has occurred through the reduction of the stock of those assets. Those effects should gradually wear off over time.

One unusual feature of this event, in contrast to testimony before the US Congress, was that Chairman Bernanke received three questions on the US dollar, 15 percent out of the total of 20 questions. He aligned himself with Treasury Secretary Timothy Geithner’s statement on Tuesday, April 26, at the Council on Foreign Relations that “a strong dollar is in our interest as a country” and the United States will not embrace a strategy of trying the weaken its currency to gain economic advantage.  Bernanke inserted “and stable” after “strong” and added that this was in the “global interest.” He linked his comment to the Federal Reserve’s dual mandate of maximum employment and price stability—a healthy economy promotes a strong and stable dollar. In fairness, market participants in recent days appear not to be convinced that US policies will produce either a strong or a stable foreign exchange value of the dollar.

Bernanke addressed forcefully the core issue of US fiscal consolidation, but distinguished between the short run and the longer run. He endorsed, as he has before, the need for a credible long-term fiscal plan without going into details. He did not anticipate actions that would have negative effects on the economy in the short term.  However, he implied that if that were the course that the Congress and Administration chooses, it would affect Federal Reserve Policy consistent with its mandate. In other words, monetary policy would be easier than otherwise. In other words, it is important to get the balance between restoring fiscal balance and monetary balance right. Some would argue that a policy mix of all fiscal retrenchment and continuing monetary ease would weaken the dollar and distort the economy in the longer run.

In general, Bernanke nicely distinguished short-run from longer-run considerations both with respect to inflation and unemployment—though the distinctions may have been too subtle and unconvincing.  On the former, he said it is important to anchor long-term inflation expectations. On the latter, monetary policy can stimulate the economy and reduce unemployment — long-duration unemployment as well as short-duration unemployment.  However, to the extent that the long-duration unemployment persists, the Federal Reserve’s tools are limited in affecting it once the overall economy returns to normal, which he identified (according to the FOMC projections) with an inflation rate of slightly below 2 percent and an unemployment rate in the range of 5.2 to 5.6 percent.

Bernanke received no “existential questions” along the lines of what gives the Federal Reserve the right to do what it does—aside from the Federal Reserve Act. This was interesting in light of challenges to the Fed’s legitimacy or mandate echoing in some parts of Congress these days, which may interest the Congress more than reporters. The closest to such a question was one on the large size of the Federal Reserve’s balance sheet and the implications for inflation.  In answer to a question about the balance sheet, he appeared to dismiss the relevance of quantities (the amount of bank reserves) compared with interest rates and financial conditions as indicators of the stance of monetary policy.  This answer might be viewed as slightly inconsistent with his story about the channels for effects of large Federal Reserve purchases of US government securities, in which stocks or quantities matter.  Presumably, Professor Bernanke could have explained any perceived inconsistency, but there was no follow-up question that required him to do so.


Originally published at the Peterson Institute for International Economics.© 2009 Peterson Institute for International Economics.

 

32 Responses to “Bernanke Did Not Bomb”

muskallongeJune 1st, 2011 at 1:34 pm

Whenever a lot of these bank cards will be included to your truck seek the services of invest in of 10, 000, and then the do it yourself mortgage loan about L12, 000, the length of these kinds of expenses that they are crafted launched become unattainable to deal with.

Shaina MawhinneyJune 8th, 2011 at 8:06 pm

Hmm it seems like your site ate my first comment (it was extremely long) so I guess I’ll just sum it up what I had written and say, I’m thoroughly enjoying your blog. I too am an aspiring blog writer but I’m still new to everything. Do you have any helpful hints for rookie blog writers? I’d definitely appreciate it.

Dish net workJune 9th, 2011 at 4:32 pm

Thanks for any other informative site. The place else may just I get that type of information written in such a perfect means? I have a undertaking that I am just now running on, and I have been at the look out for such info.

niceMay 21st, 2016 at 10:58 am

Are you currently in a fresh country and needing some pleasurable company committed solely in your needs? Are that you simply traveling enterprise man using a full schedule in the daytime and quite a few hours of leisure time at night time?herpes dating uk

niceMay 21st, 2016 at 10:59 am

Tiles are known for their normal water resistance along with easy cleanup. If consumed care effectively, then tile flooring surfaces, walls and also other countertops look great all of which will last prolonged. But mainly because it is zero regular floorboards.home building and loan

niceMay 21st, 2016 at 10:59 am

Tiles are notable for their h2o resistance and also easy washing. If obtained care appropriately, then tile surfaces, walls as well as other countertops can look great and definately will last extended. But because it is simply no regular flooring.home inspection reports online

niceMay 21st, 2016 at 11:00 am

Tiles are recognized for their mineral water resistance in addition to easy clean-up. If considered care adequately, then tile floor surfaces, walls along with countertops will be great and may last very long. But the way it is not any regular bottom.home lands ecurity market

jasonNovember 10th, 2016 at 1:59 pm

The middle of a modeling career targets having representation with a modeling company. There are different ways for unrepresented models to locate work, however the role of the modeling agency ought to be understood through the model in order to compliment their own career.indian call girls dubai

niceMay 21st, 2016 at 11:00 am

Tiles are notable for their waters resistance plus easy cleaning up. If utilized care accurately, then tile floorings, walls and various countertops looks great but will last extensive. But while it is virtually no regular floors.home performance 360

niceMay 21st, 2016 at 11:01 am

Tiles are known for their standard water resistance together with easy maintenance. If undertaken care thoroughly, then tile carpeting / flooring, walls together with other countertops can be great and definitely will last longer. But simply because it is hardly any regular carpet.organizing home office

niceMay 21st, 2016 at 11:01 am

Tiles are recognized for their liquid resistance and even easy maintaining. If ingested care accordingly, then tile floorboards, walls besides other countertops will great and will eventually last much time. But because is very little regular bare floors.home of job

niceMay 21st, 2016 at 11:01 am

Despite from the durability as well as longevity, marble tiles are often stained. Since the case, anything made associated with marbles demands regular treatment and cleansing. However cleansing of marble isn't same because that associated with cleaning associated with regular flooring.economic development skills

niceMay 21st, 2016 at 11:08 am

Despite belonging to the durability and even longevity, marble tiles are often stained. Given that the case, something made in marbles usually requires regular good care and maintaining. However maintaining of marble is simply not same simply because that in cleaning in regular floorboards.cleaning house

niceMay 21st, 2016 at 11:09 am

Despite of this durability not to mention longevity, marble tiles can be stained. Being the case, any item made from marbles will take regular care and attention and vacuuming. However vacuuming of marble is absolutely not same for the reason that that from cleaning from regular floor coverings.fowlers furniture

niceMay 21st, 2016 at 11:09 am

Despite for the durability and additionally longevity, marble tiles are easily stained. For the case, anything made about marbles will involve regular maintenance and housecleaning. However housecleaning of marble isn't really same like that about cleaning about regular grounds.access furniture

niceMay 21st, 2016 at 11:10 am

There is certainly more variety of places in which people wish to travel with their loved ones and family throughout the year. We must understand there are more variety of travel organizations is operating around the globe.aruba trike tours

tourOctober 15th, 2016 at 6:03 am

Selecting one from many style jobs generally is definitely an overwhelming problem. There are a number of different opportunities within the fashion industry which you may not make sure which the first is best for you personally. <a href="http://www.visualfusion.biz” target=”_blank”>www.visualfusion.biz

wpyakAugust 15th, 2017 at 8:39 am

This article will give you a pointed thought on the hazard components related with programming advancement ventures. Besides, you would become acquainted with how you can reduction such dangers in the advancement procedure.wpyak

Film WorldNovember 1st, 2017 at 1:39 pm

This is always a fun place to discover something new. They focus on the genres of comedy, action, drama, sci-fi, and horror — doing an amazing job of sorting through the piles of junk online and cherry-picking the best in fresh and classic entertainment.
Film World

Film WorldNovember 1st, 2017 at 1:39 pm

This is always a fun place to discover something new. They focus on the genres of comedy, action, drama, sci-fi, and horror — doing an amazing job of sorting through the piles of junk online and cherry-picking the best in fresh and classic entertainment.
Film World

Film WorldNovember 1st, 2017 at 1:39 pm

This is always a fun place to discover something new. They focus on the genres of comedy, action, drama, sci-fi, and horror — doing an amazing job of sorting through the piles of junk online and cherry-picking the best in fresh and classic entertainment.
Film World

Usama AwanOctober 30th, 2018 at 12:59 pm

MajBoor Aadmi is a site where you can see all type of Viral News, Latest News and Latest Gossips.
Viral and latest news is a networked news stories that spread online mostly through social media in a much
faster and wider manner than other news stories, and this study investigates the elements that
make news viral on social media platforms.
Gossip is informal conversation, about other people's private affairs. It's casual or
unconstrained conversation or reports about other people, typically involving details which are
not confirmed as true.

CrytocurrencyDecember 8th, 2018 at 10:33 am

A Good New for Crypto Lover's. Soon A Brand New Coin will be launch in market and Boost your profit more then 500%.
So Don't Be late Join Cryptocurrency before ICO Starts and Grab your Coin in 90% off Price.
but 1 more thing will be launch a AirDrop where you only need to Join our Group to get your Free Coin(token)