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.