Thursday, April 28, 2011


Ben Bernanke held his first post-FOMC meeting press conference today:

Reactions: Mark Thoma, Tim Duy, Paul Krugman, Brad DeLong, David Beckworth, Calculated Risk, Free Exchange, Catherine Rampell. The conference was liveblogged by the Times' Floyd Norris and by WSJ reporters.

The general tenor of the reactions (particularly the first five in the list above) is disappointment that it sounds highly unlikely that the Fed will undertake further expansionary policy beyond the $600 billion quantitative easing program currently in progress.  This is particularly frustrating in light of the Fed's own revised projections, released today:
The "longer run" unemployment number can be taken as the Fed's estimate of the "natural rate," the lowest rate consistent with non-inflationary growth.  The Fed is saying that it expects the unemployment rate to be significantly above the natural rate for at least three more years.

I think this statement was particularly telling:
I think that while it is very, very important for us to try to help the economy create jobs and to support the recovery, I think every central banker understands that keeping inflation low and stable is absolutely essential to a successful economy and we will do what is necessary to ensure that that happens. 
While Bernanke is always careful to explain policy decisions in terms of the Federal Reserve Act's "dual mandate" of low unemployment and price stability, here he is subtly putting more weight on the inflation part ("absolutely essential"), relative to employment ("very, very important").  I think this is because "every central banker" is deeply afraid of repeating the mistakes of the 1970's, when high inflation became embedded in the economy, and could only be brought back under control with a very painful dis-inflation in the early 1980's.  It may be that, in addition to hurting consumer sentiment, by providing a reminder of "stagflation" of the seventies, the recent run-up in oil prices is also casting a large shadow over the psyche of central bankers.

Also, the academic literature places significant emphasis on expectations and credibility, so the "hawkish" talk is likely partly motivated by a desire to keep a lid on inflation expectations. Of course, credibility ultimately depends on actions consistent with the talk.

While some of us academic types were disappointed in what we see as an excessive emphasis on inflation relative over employment (this is not universal: for a contrary view, see Steve Williamson), the markets may have read things differently.  Treasury yields rose today, which suggests that the news from the Fed was slightly less hawkish than expected.

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