February 15, 2006
The Bernanke era begins
New Fed Chair Ben Bernanke provided his first testimony before Congress this morning.
There had been some anticipation that Bernanke would use this as an opportunity to convince markets he would be a fierce hawk on fighting inflation. For example, Edward Hugh called attention on Monday to this assessment from Bloomberg:
"He's given his helicopter speech and established his anti-deflation credentials," says Tom Gallagher, Washington-based senior managing director at ISI Group, a New York money-management and research firm. "Now he's got to give his howitzer speech and establish his anti-inflation credibility."
Anyone wanting to see Bernanke brandish his weapons had to be disappointed. Bernanke offered these assessments of economic prospects over the next two years:
- real GDP would grow at 3 to 3-1/2 percent, which is slower than it has been for the last two years and slower than the long-run average rate as well
- unemployment would average between 4-3/4 and 5 percent, a slight increase from its current value
- inflation, as measured by the price index for personal consumption expenditures excluding food and energy, will be between 1-3/4 and 2 percent
- a number of indicators point to a slowing of the housing market
These assessments seem to reflect the view that the Fed has already done enough to achieve a moderate degree of slowing. Bernanke acknowledged the risks of an acceleration of inflation, but with the following choice of words (emphasis added):
Among those risks is the possibility that, to an extent greater than we now anticipate, higher energy prices may pass through into the prices of non-energy goods and services or have a persistent effect on inflation expectations.
Inflation could accelerate, but it's not what he's currently expecting. He also endorsed the vital role of the Fed in keeping inflation low, but here again the words he used are revealing:
Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability in output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the economy.
In other words, one of the reasons we want to keep inflation low is to preserve the flexibility to counter an output slowdown with a monetary expansion if needed. Overall, this does not sound to me like a man who has the slightest desire to preside over the Bernanke Recession of 2006.
Fed funds rate to 5% by May? The market seems to think so. But after today's testimony, I have my doubts.
Posted by James Hamilton at February 15, 2006 09:42 AMdigg this | reddit
It's nice to have someone in the chair who speaks English,for a change.
Posted by: jim miller at February 15, 2006 04:37 PM
I don't even understand why this matters in the current environment. The current administration and Congress make no pretense of either making honest estimates(5-year horizons, silencing actuaries) or of finding offsets for their tax cuts and spending increases, so I don't see the importance of how they score these things.
Posted by: matt wilbert at February 15, 2006 05:26 PM
That last comment belonged with the previous post. Sorry.
Posted by: matt wilbert at February 15, 2006 05:27 PM
Where can I get a transcript or see a video of the hearing? I was listening to it on Bloomberg and heard Bernie Sanders lecturing him about the need for raising the minimum wage. Bernanke was trying to be polite to him while not agreeing. I missed the ending, just when Sanders was trying to press him on his answer. It must be very trying to sit there and listen to some of those dummies lecture you.
Posted by: Rich Berger at February 16, 2006 06:14 AM
Congressman Ron Paul of Texas questioned new Federal Reserve Chairman Ben Bernanke regarding the Federal Reserve's intent to stop publication of M3 money supply figures as of March 2006. http://www.house.gov/paul/press/press2006/pr021506.htm
What was Dr. Bernanke's response to Rep. Paul's questions?
Posted by: Suresh at February 16, 2006 09:27 AM
It's funny that the reports I am reading today are all about how clear Bernanke's message was about inflation and interest rates. The Congressmen fell all over themselves congratulating him on his clarity and comparing him favorably to Greenspan's supposedly obscure commentary. The NY Times calls his report "brief, clear" and writes, "He gave short answers, generally free of twists and turns that could be interpreted in two or more ways." I guess people hear what they want to hear.
Posted by: Hal at February 16, 2006 10:57 AM
"These assessments seem to reflect the view that the Fed has already done enough to achieve a moderate degree of slowing."
But you cannot mean that, professor, as Bernanke didn't state the fed funds rate assumption to these forecasts. One can infer little about the future fed funds rate from these forecasts: if the forecasts are for the next 6-9 months, the funds rate path going forward won't have enough time to impact the outcome; but if the forecasts are for 12-month ahead, then they are more like "goals".
In fact, I have long held the view that without explicitly stating the assumption of the funds rate path, these forecasts are of vey little use.
A separate issue: I think it's a bad idea that the FOMC picks PCE index as their main measure of inflation. For one thing, PCE gets revised a lot; for another, it has all those non-marktet components. Both of these issues complicate the communications with the public, unnecessarily.
Posted by: pat at February 16, 2006 01:53 PM
Excellent point, Pat. I was thinking that for the next six months at least, what happens is pretty much determined by what the Fed has already done, which would get us most of the way through 2006. But you're right that for the 2007 forecast, one might read Bernanke's statement as saying that he intends to do whatever it takes to keep 2007 growth a little below average!
Posted by: JDH at February 16, 2006 02:23 PM
I looked up the transcript on a computer at the local university, and these were the responses by Bernanke to the above questions --
"My response is that I think it doesn't lower employment. However, I note that the literature is fairly controversial on this subject..."
"one might consider alternative ways of helping working-class Americans; for example, the Earned Income Tax Credit, which delivers money to working families without necessarily the employment effects."
"In particular, M2 has proven to have some forecasting value in the past, and I think the slowdown this year is consistant with the removal of accommodation that's been going on."
"...our research department's conclusion was that M3 was not being used by either the academic community nor were we finding it very useful ourselves in our internal deliberations."
The committee members also asked about the GSEs (Fannie Mae and Freddie Mac) and industrial loan companies (ILCs), which I didn't see much coverage of.
Posted by: lk06 at February 17, 2006 10:47 AM