Ben Bernanke’s Inflation Targeting and Forecasting

I made my displeasure known last week about the Pause/Resume scenario. A friend takes a slightly different tack, explaining that Fed Chair Bernanke’s inflation targeting is even worse than my criticism implies.

Why? As I explained in the Folly of Forecasting, predicting the future is something we Humans are particularly bad at.  And that’s what inflation targeting requires:  getting the projected inflation rate right. 

Which raises the question as to whether "Gentle Ben" might be better at it than "Easy Al." Don’t bet on it; here’s what Beranke said in January 2004 about Oil and Gold: 

"Two specific commodity prices that often command attention are the prices of
gold and crude petroleum. The price of gold has increased roughly 60 percent
since its low in April 2001, from about $255 per ounce to about $410 per ounce.
A portion of that increase simply reflects dollar depreciation, which I will
discuss momentarily. Gold also represents a safe haven investment, however, and
I agree that there have been periods in the past when the fear that drove
investors into gold was the fear of inflation. But gold prices also respond to
geopolitical tensions; these tensions have certainly heightened since 2001 and,
in my view, can account for the bulk of the recent increase in the real price of

Oil prices are relatively high, in the range of $33/barrel, but they have
been elevated for most of the past four years, despite a broadly disinflationary
According to futures markets, oil prices are expected to decline
gradually over the next two years, despite accelerating economic activity, as
new supplies are brought on line. Of course, there is considerable uncertainty
about what the price of oil will do, given the possibility of supply
disruptions. But if it follows the course projected by the futures market, the
price of oil should have a modest disinflationary effect on overall consumer
prices in the next couple of years."   (emphasis added)
-Ben Bernanke, January 4, 2004

Remind again about the advantages of inflation targetting . . .


Remarks by Governor Ben S. Bernanke
At the Meetings of the American Economic Association, San Diego, California
January 4, 2004
Monetary Policy and the Economic Outlook: 2004

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  1. Robert Cote commented on May 1

    According to futures markets, oil prices are expected to decline gradually over the next two years…”
    -Ben Bernanke, January 4, 2004 [oil $33/bbl]

    It’s a good thing he’s not in charge of the Fed or anything.

  2. hbj commented on May 1

    Wow. Thanks for that.

    If someone presumably so smart and unbiased can be so incredibly wrong, how in the world can we know whom to listen to or what to do?

  3. wcw commented on May 1

    ..and Greenspan was a bull on stocks right before the ’73-4 bear market hit. All this tells us is never to hire either man to run money.

    Setting monetary policy is the diametric opposite of buy-side work. It’s one of the few human endeavors at which committees excel. Bernanke should be fine in his comparatively limited role. If things go south — and I believe there is a nonzero probability they may — it will not be the fault of his policies, any more than it will be to his credit if they don’t.

    The US is in trouble because of its current account and budget deficits and its destabilizing imperial adventurism, not because its reserve bank has rates set wrong by fifty basis points in one or the other direction.

    Full disclosure: I didn’t like Greenspan either, but on balance he was a more-than-adequate central banker. No hero he, either, but no villain.

  4. DJ commented on May 1 is reporting that Stephen Roach has capitulated and is now more optimistic about world growth. That must mean the crash is very near.

  5. Apex commented on May 1


    Agree except for the comment about imperialism. Disagreement with the war is reasonable but suggestion that it is imperialistic is to be ignorant of what imperialism is. If the US is imperialistic then it is exceedingly bad at it because it doesn’t end up owning or controlling any of the lands or resources of the lands it supposedly takes by imperialism.

    That aside, difficulties for the US are not because of any military “adventurism” that the US is engaged in except for the extent to which it contributes to the debt, which it does.

  6. jim commented on May 1

    New 6 month I Bond rate 2.41%. How’s that for a kick in the nuts?

  7. ndk commented on May 1

    Yeah, DJ, I caught that too, and now I’m truly scared. He hasn’t made a correct call in at least 6 years, but I’m not sure it’s his fault. Maybe it’s the entire market treats him as a contrarian indicator and thus moves against him.

    If only he realized the power he has…

  8. ndk commented on May 1

    Various markets hit various walls thanks to Bernanke sending his buddy Moskow to relay a message on his behalf to the markets. Apparently we misheard him.

    It’s almost as though he sent his friend out to stick up for him…

  9. B commented on May 1

    But the experts are also quoting the oil futures prices now as their supporting evidence. $70+ a year from now. Maybe Richard Bernstein should be the Fed chairman. He’s nailed all of these asset cycles because he understands human behavior and the flow of funds.

    wcw, I listen to you end-of-world types all of the time. Inflexible thinking keeps one from making money in bull and bear markets. How can you ever be long anything but gold with that type of inflexible mindset? Honestly, how can you take a long trade and do it hard enough to make big money being so convinced you are right that America’s growth is over? Did you go long in 2003 or were you convinced we were going to Dow 3000 along with Robert, I’m never bullish, Prechter? It’s fun to speculate on the future but what the hell do you know about America’s global hegemony ending? Really? You guys are never right. Oh, once every 25 years when gold rises from the ashes and the perma-bears feel vindicated. America is not losing its leadership mantle one bit. The Indians and Chinese collectively have 2 billion people who don’t have running water or can even read. They spend a dollar getting someone into a one room shack with running water and we spend a dollar mapping the human genome. We might get a severe equity correction. Might have a dollar mess. We might have a housing mess. Might eventually have a fiscal mess that finally forces some serious structural changes. Might, might, might. There’s an old Japanese saying. “If my grandmother had balls, she’d be my grandfather.” One should be defensive in their portfolio but that happens about every four years. Do you whine like this every four years? What does your wife think? She ready to kick you out yet?

    Even if they all come true, and that would be one fat tail, what is the outcome? The end of America? Seriously? Our economy is the most flexible on the globe and the one best equipped to deal with any type of global crisis should one ever come to pass. But who the hell is going to take our place? The commie Chinese? Oh, come on. The Egyptians? The Europeans? The Koreans? The Indians? The Nigerians? Christ the whole world is driven by American wealth. Whether those are financial markets, global investments or consumption. You guys never quit. Btw, I’m just playing with you. I’m sure you are right. I just ordered my first bomb shelter and put all of my assets in gold.

  10. B commented on May 1

    Minister Naimi just said his country may have up to 1 trillion barrels of undiscovered reserves. 50% of known reserves are not recoverable with current technology so there is still tremendous opportunity in known reserves as technology improves as it has for decades. Rex Tillerson, CEO of XOM, just said easy oil is OVER……….BUT HAS BEEN OVER FOR DECADES. He also said they are spending $2 million a day on new methods of recovering oil. IT IS GLOBAL LIQUIDITY DRIVING OIL AND THEY ARE GOING TO EVENTUALLY GET BURNED. All of the guests on CNBC espousing oil fallacies are Wall Streeters. Conflict of interest there? Eh?

    Where is peak oil? Where are the facts supporting it? Hubbert’s Peak? PHOOEY!

  11. wcw commented on May 1

    In re “imperial adventurism,” I consciously chose the adjective and not the noun form of the word. With US military bases girdling the globe, I feel quite comfortable with my characterization.

    B, you may be projecting someone else’s arguments onto my simple point that Bernanke’s not going to be a unitary cause of potential problems. If you want I’ll stack my track record up against yours, but generally I avoid dick-swinging contests. Luck trumps skill every time.

    In re US triumphalism, there have been some dandy bull markets outside the US these last few years. I’m wholly uninterested in US hegemony unless it affects me or my portfolio. Did your rant point to either?

  12. trader75 commented on May 2


    Yo, does peak oil really matter? In terms of where energy stocks and crude oil is trading right now, I mean? According to Dan Rice at Blackrock Global, energy stocks are still priced for $45 oil through 2012.

    And a geopolitical event of significant proportions would cause some major supply ruckus here and now, not at some distant point in future. Chavez, Ahmadinejad, Putin… they ain’t just whistlin’ Dixie.

    Even if the peak oil theory were completely dismissed, the reality of bottlenecks would still be driving the bus in terms of valuations. It ain’t just how much is in the ground, but how fast you can get it out…. Ali Naimi laid that out last year when someone asked him about peak oil. He pointed out that the demand curve of the developing world may be the real issue; think 40 cars lined up at a single gas pump.

    The relevant question, in my humble opinion, is how long global growth will keep us pressed up against the margins, and how long it will take for a new cycle of energy infrastructure development to catch up.

    This whole merry-go-round, and by that I mean the entire global financial system, Bretton Woods II, stable disequilibrium, all of it, is being kept aloft by liquidity injections and projections of ongoing global growth. Any scenario that breaks energy stocks in half pretty much breaks all paper assets in half… the structural reality for energy is that much more investment is needed, on a long term basis, to shore up our woefully neglected infrastructure now and to meet projected demands of global growth. This is true like the sky is blue, even if peak oil turns out to be horseshit. There is still a valuation case to be made for oilpatch… they haven’t gotten to can’t lose / nifty fifty status yet.

    By the way B, you sure do look smug smashing up the bears and their crystal balls… especially for a guy who predicted with confidence that GM and Ford would rise again and outshine Toyota in their new march to quality (!!!)… I don’t remember your exact words, only that my jaw dropped at such blatant Pollyanna Americana spew… Some of us have a little Prechter in our blood, but you’ve got some Kudlow in yours. C’mon now, be a man and admit it… Methinks thou doth protest a bit too much in some of these “Gawd I Love America” rants. As if you were trying to convince yourself as much as anyone else…

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