Bernanke today has joined other voting and non voting Fed members in giving their opinions of what the FOMC announced on Sept 13th. The topic of his speech is “Five Questions about the Federal Reserve and Monetary Policy” and its his venue of trying to defend Fed action. Nothing is new and is more just a reiteration of what we already know. “We expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens.” While the criticism of Fed policy in the middle part of last decade was that they kept rates too low for too long (and we know the results), Ben wants to do it again by saying they “will take care not to raise rates prematurely.” The definition of premature evacuation of Fed policy at some point will of course be very subjective and the driver will be where inflation goes from here. On inflation, he starts by saying that the Fed’s “price stability record is excellent.” He defines “excellent” as only a 2% annual reduction in the purchasing power of the US$. In response to hearing “are you monetizing the debt-printing money for the gov’t to use-and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen.” He differentiates money printing and what he claims they are doing by saying money printing is a permanent source of financing for gov’t spending where he said what the Fed is doing is temporary.” Semantics I say. His benign inflation outlook was repeated and he remains confident that they have the tools to exit when necessary with necessary being the huge unknown. I conclude and repeat that whether they get the timing right or not, unwinding their balance sheet and normalizing the fed funds rate will be highly disruptive.
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