The real message behind Bernanke's speech

Posted Nov 14th 2007 12:54PM by Douglas S. Roberts
Filed under: Forecasts, Conventions and Conferences, Market Matters, Economic Data, Headline News, Federal Reserve

Chairman Ben Bernanke gave a speech this morning to the Cato Institute on Federal Open Market Committee (FOMC) communications. The key points were increasing the number of Fed economic forecast reports from twice a year to quarterly and extending the horizon for projections from two to three years. This is in line with the current Fed's desire to increase transparency.

However, the real message behind the speech was Chairman Bernanke's discussion of the Fed's dual mandate of price stability and maximum employment.

For those inflation hawks who believe that the Fed should strive for zero inflation, the Fed Chairman acknowledged reality by saying that this was inconsistent with the other part of the dual mandate. Although zero inflation is possible, the cost would be too high. Dr. Bernanke is merely stating what most people implicitly understand. He also rejected the claim that this Fed is soft on inflation by indicating that the Fed aims for a very low level.

For those focused on economic growth, he also mentioned the Fed's limitations on achieving maximum employment by indicating that other factors beyond the Fed's control impact employment. This confirms that the Fed, while using monetary policy as an economic tool, cannot do it alone. Sound fiscal policy will also be required.

This is a data dependent Fed. It does not take action unless the data indicates there is a need. The increased frequency in reporting will give the public greater insight into how the Fed interprets this data. If the economy gives indications that it is deteriorating substantially, the Fed will ease monetary policy including future rate cuts. However, this will occur only if the data indicates a need to do so.

Based upon the economic reports this morning, the economy appears to be slowing. However, a December rate cut is not guaranteed. The Fed will be examining additional data. Be prepared for increased market volatility as more economic news is released!

Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

Tags: Ben Bernanke, BenBernanke, Cato Institute, CatoInstitute, featured, Federal Open Market Committee, Federal Reserve, FederalOpenMarketCommittee, FederalReserve, inflation

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Reader Comments (Page 1 of 1)

11-14-2007 @ 1:13PM

John said...

Inflation is not evil. It has a valid role in a market. It's nice to see the Federal Reserve is out of the exorcism business.

11-15-2007 @ 12:00PM

Gio B. Gori said...

The greatest news is that the FOMC Chairman himself recognizes the incompatibility of the dual mandate of ensuring price stability and full employment, and his pitch to Congress to restore the single mandate of price stability. Will it happen? Not until Wall Street has its hands on the wheel. The heavy finance is a speculatory affair prospering on "exuberant excesses", and by now they are used to have their bubbles reflated by fiat government money, and therefore by inflation.

Inflation is evil, and since money was invented a few millennia ago, inflation has been the tool of scoundrels, paying off their IOUs at half price. Inflation compounds just like interest, and a (low?) 2% annual inflation means that the purchasing power of paper money is reduced of 50% in about 25 years! It means that people now getting their social security checks get a negative interest on the money they contributed over the prior 40 years. Who can say that inflation is not evil?

If honest people were to run the show, inflation should not be tolerated, and we should judge their trustworthiness by the inflation they are willing to cause by the reckless running the paper money presses.