Ben Bernanke’s Press Conference

Today marks the first time we are witnessing a regularly scheduled news conference by a Fed chairman in the Federal Reserve’s 98-year history. Most reactions to Ben Bernanke’s performance were positive, meaning he reiterated the themes he has consistently delivered in the past without making any gaffes. But that goes to style; what about substance? Here’s my take.

Jobs: Bernanke has the right view here; the jobs market is improved but still relatively weak with broader unemployment around 16% and long-term unemployment a continuing problem. The Fed even cut its GDP growth forecast, demonstrating the underlying weakness. The Fed has a dual mandate which means it must take this into account in setting policy. Realistically, this means low rates. Now, of course, I don’t believe the Fed should have any mandates because I don’t think it should control interest rates; so I am against this. Low rates are a blunt instrument that leads to speculation and a misallocation of capital. But, this is the mandate the Fed has been tasked with.

Inflation: Core inflation is below target, meaning the Fed wants it to be around two percent so that it can have room to manoeuvre. If the inflation rate falls too much, the real burden of private sector debts becomes a problem. The Fed, having reached the zero bound, cannot use the interest rate lever. Therefore, you should expect the Fed to be relatively dovish. Bernanke was. He was not dovish enough according to Paul Krugman, though.

PCE Change

Again, I don’t believe the Fed should have any mandates because I don’t think it should control interest rates; so I am against this. The real question is about core inflation versus broader inflation targets. Should Central Banks Focus On Core Inflation?

I agree with John Brynjolfsson that we don’t want the Fed micro-managing the economy. I would go one further and say that the inflation targeting the Fed does do is an impossible task. I would rather have markets set interest rates. But in the system we have, short-term interest rates are centrally planned…

And there is a certain reflexivity to Fed policy in an environment of slack demand and overcapacity. The Fed lowers rates to stimulate demand. This provides tinder for a buildup of leverage. Think technology IPOs, emerging market mania, or commodity speculation. While the systemic risk from the leverage should be worrying in and of itself, the rise in financialized commodity assets is the area where this leverage can have the most immediate economic effects…

The Fed is doing exactly the same thing it did in 2001 and again in 2008. Each time, it has needed to be more aggressive in its policy because it refuses to let the macro disequilibria unwind. It’s the debt. That’s the problem. And lowering rates or printing money doesn’t make this go away.

If you believe asset bubbles form as a result of low interest rates as I do, you would want the Fed to address this by being less accommodative. If you believe Jeremy Grantham as I do that we are in a paradigm shift that means commodity prices will be a constant source of inflationary pressure, then you would want the Fed to take this into account.

On the whole, Ben Bernanke did an excellent job managing expectations and delivering. The new communications strategy at the Fed is exactly what I expected it to be. Bernanke may well be able to rehabilitate the Fed’s battered public image. However, I think the Fed has an impossible mandate. It is tasked with a interest rate central planning role of managing both inflation and employment in a large and dynamic economy. It is unrealistic to expect it to do so well.

Right now, we are in a debt deflationary environment, meaning that if it weren’t for the huge amount of economic stimulus applied by the Fed and the federal government, the economy in the U.S. would look more like what we see in Britain, if not Ireland or Spain. That means low rates and dovish talk. Moreover, policy makers have decided to prevent macro disequilibria from unwinding and that will have negative implications for both the fragility of the US economy and banking system and for growth down the line.

The videos of Q&A are below.

P.S. – Bernanke did adlib his thoughts on the debt and deficit situation since he was asked about it. I had mentioned yesterday in my BNN interview that this would be an interesting exchange to watch. It starts in the second video at about the 8:30 mark.

4 Comments
  1. Mario Tenaglia says

    Ed thanks for your stuff man. I am a fan and regular reader and appreciate your POV.

    I have a question for you. You state this:

    “policy makers have decided to prevent macro disequilibria from unwinding and that will have negative implications for both the fragility of the US economy and banking system and for growth down the line.”

    Does this mean that you would have preferred no QE1, no bailouts, and more white collar prosecution, much tighter regulations?

    Also you say Ben was “dovish” as they are in UK and EU…however all I hear him talk about his balancing the budget and speaking “adlib” on the debt as you say above. Where do you see him saying “dovish” things?

    Thanks again and be well.

    1. Edward Harrison says

      Gavyn Davies does a good job of explaining Bernanke’s dovish comments. He writes:

      “the press conference has probably strengthened the hand of the doves, because the chairman is so clearly still in the dovish camp himself. However, the chairman did try his best to speak for the entire committee, for example by suggesting that the balance sheet could be reduced in size fairly soon (albeit very gradually), and by saying that the “extended period” language on rates offered guidance for only about three months ahead, instead of six months as previously assumed. This was probably intended to placate the hawks.”

      http://ftalphaville.ft.com/blog/2011/04/28/556201/reflections-on-bernanke/

      As I pointed out in my comments above, economists like Dean Baker and Paul Krugman feel that Bernanke was not dovish ENOUGH. So I called him “relatively dovish” especially when you see the dollar’s reaction. It is clear now that the ECB is tightening much earlier than the Fed because the Fed is on hold through 2011 and beyond.

      As for QE, QE1 is a bit harder to talk negatively about than QE2 because we did have a liquidity crisis at the time. I think the Fed did it’s role as lender of last resort, although opaquely and not at a penalty rate.

    2. Edward Harrison says

      Gavyn Davies does a good job of explaining Bernanke’s dovish comments. He writes:

      “the press conference has probably strengthened the hand of the doves, because the chairman is so clearly still in the dovish camp himself. However, the chairman did try his best to speak for the entire committee, for example by suggesting that the balance sheet could be reduced in size fairly soon (albeit very gradually), and by saying that the “extended period” language on rates offered guidance for only about three months ahead, instead of six months as previously assumed. This was probably intended to placate the hawks.”

      http://ftalphaville.ft.com/blog/2011/04/28/556201/reflections-on-bernanke/

      As I pointed out in my comments above, economists like Dean Baker and Paul Krugman feel that Bernanke was not dovish ENOUGH. So I called him “relatively dovish” especially when you see the dollar’s reaction. It is clear now that the ECB is tightening much earlier than the Fed because the Fed is on hold through 2011 and beyond.

      As for QE, QE1 is a bit harder to talk negatively about than QE2 because we did have a liquidity crisis at the time. I think the Fed did it’s role as lender of last resort, although opaquely and not at a penalty rate.

  2. Mario Tenaglia says

    Ed thanks for your stuff man. I am a fan and regular reader and appreciate your POV.

    I have a question for you. You state this:

    “policy makers have decided to prevent macro disequilibria from unwinding and that will have negative implications for both the fragility of the US economy and banking system and for growth down the line.”

    Does this mean that you would have preferred no QE1, no bailouts, and more white collar prosecution, much tighter regulations?

    Also you say Ben was “dovish” as they are in UK and EU…however all I hear him talk about his balancing the budget and speaking “adlib” on the debt as you say above. Where do you see him saying “dovish” things?

    Thanks again and be well.

    1. Edward Harrison says

      Gavyn Davies does a good job of explaining Bernanke’s dovish comments. He writes:

      “the press conference has probably strengthened the hand of the doves, because the chairman is so clearly still in the dovish camp himself. However, the chairman did try his best to speak for the entire committee, for example by suggesting that the balance sheet could be reduced in size fairly soon (albeit very gradually), and by saying that the “extended period” language on rates offered guidance for only about three months ahead, instead of six months as previously assumed. This was probably intended to placate the hawks.”

      http://ftalphaville.ft.com/blog/2011/04/28/556201/reflections-on-bernanke/

      As I pointed out in my comments above, economists like Dean Baker and Paul Krugman feel that Bernanke was not dovish ENOUGH. So I called him “relatively dovish” especially when you see the dollar’s reaction. It is clear now that the ECB is tightening much earlier than the Fed because the Fed is on hold through 2011 and beyond.

      As for QE, QE1 is a bit harder to talk negatively about than QE2 because we did have a liquidity crisis at the time. I think the Fed did it’s role as lender of last resort, although opaquely and not at a penalty rate.

  3. Anonymous says

    Hi Edward, why/where do you argue that the Fed should not set interest rates? I don’t remember seeing this argument before. Thanks.

    1. Edward Harrison says

      I have said for some time that the Fed has shown that it cannot micromanage the economy by adjusting rates. It raises them too slowly and keeps them low for too long. This has created a situation in which there simply is not enough deleveraging at cyclical turns.

      See here:
      https://pro.creditwritedowns.com/2009/10/a-brief-look-at-the-asset-based-economy-at-economic-turns.html

      The conclusion I have come to is that the Fed should not have an interest rate mandate. I know Randy Wray has the same conclusion. The difference is that he believes they should keep rates at zero permanently and I believe we should let the market set the rate. Zero is not the appropriate rate at all times in a business cycle. Is it ever the appropriate rate?

  4. Anonymous says

    Hi Edward, why/where do you argue that the Fed should not set interest rates? I don’t remember seeing this argument before. Thanks.

    1. Edward Harrison says

      I have said for some time that the Fed has shown that it cannot micromanage the economy by adjusting rates. It raises them too slowly and keeps them low for too long. This has created a situation in which there simply is not enough deleveraging at cyclical turns.

      See here:
      https://pro.creditwritedowns.com/2009/10/a-brief-look-at-the-asset-based-economy-at-economic-turns.html

      The conclusion I have come to is that the Fed should not have an interest rate mandate. I know Randy Wray has the same conclusion. The difference is that he believes they should keep rates at zero permanently and I believe we should let the market set the rate. Zero is not the appropriate rate at all times in a business cycle. Is it ever the appropriate rate?

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