Bernanke: Sacrificing Price Stability For A Few Jobs Would Be 'Reckless'!

MAKE MONEY BLOG$~In his post-FOMC press conference, Fed Chairman Ben Bernankeengaged in some fence-sitting, maintaining that QE3 “remain[s] very much on the table,”
while rejecting calls to do more to lower the unemployment rate.  In addition, Bernanke denied his current policy stance contradicted his views as an academic (where he told the Bank of Japan to be more aggressive) and warned of the risks of the “fiscal cliff” that would ensue if Congress doesn’t make up its mind about spending cuts.

Wednesday’s FOMC and press conference duo came with no surprises.  After a policy statement indicating the Fed remains on hold on all policy fronts (while maintaining its ultra-accommodative monetary policy), Fed chief Ben Bernanke told reporters both that more QE could be detrimental, but that QE is still an option.

Market response to Bernanke and the FOMC statement was tepid, with equities moving slightly higher (led by the Nasdaq, up 2.3% to 3,029 on the back of Apple’s stellar earnings); the Dow was up 0.7% to 13,095.  Yields on 10-year Treasuries were more responsive, jumping from a low of 1.97% to above 2.03% before correcting back down to 1.99% by 3:14 PM in New York.  Gold fell precipitously, but recovered and was trading up 0.03% to 1,643.50 an ounce.

Back to Bernanke’s press conference, the formerPrinceton University professor defended his tenure at the Federal Reserve, noting they had been incredibly “aggressive” in their monetary response to the crisis.  While exceptionally low rates and loose monetary policy remain a necessity, QE doesn’t appear to be in the cards for the moment.

Asked if unemployment rates that were still stubbornly high, coupled with controlled inflation, were cause to use balance sheet tools (QE) to support the recovery, Bernanke said the Fed was already very easy.  When a reporter asked if Bernanke’s current views contradicted his positions as an academic, when he suggested that the BoJ use every tool in its power to fight what became the lost decade, the Fed chief, visibly more aggressive, said the situation was completely different.  Japan faced a deflationary environment (i.e. falling prices), while the U.S. economy is growing and prices are close to the Fed’s 2% target.

Pursuing higher inflation for the sake of a “slightly” better employment situation would be “reckless,” said Bernanke.  If inflation were to “run above 2% for an extended amount of time,” Bernanke explained, “[the Fed] would lose credibility,” while loosening expectations that have come to be anchored.  At the end of the day, it would be harder for the Fed to use policy tools to affect employment, given the loss of credibility, argued Bernanke.

Still, some have claimed Bernanke has done exactly that.  Critics have accused Bernanke of disregarding the nefarious effects of massive balance sheet expansion.  An inflationary spiral could hit as the Fed tries to unwind its current monetary stance, they argue.  In response, Bernanke points at the current rates of inflation.

After defending the Fed’s release of FOMC members’ projections for the Federal Funds rate and other parameters, Bernanke was asked about fiscal policy, and if it should be a variable to take into account.  The bearded academic noted the “fiscal cliff” could be very dangerous, posing an important risk to the economic outlook.  Bernanke asked Congress to deliver a spending plan that included putting the deficit on a sustainable path to recovery, but not at the expense of the fragile economic recovery.

“If no action were taken by the fiscal authorities,” explained Bernanke, “the size of the fiscal cliff is such that there’s absolutely no chance that the Federal Reserve could, or would have any ability whatsoever to offset that effect on the economy.”

source: forbes.com

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