Once again I recommend the most recent statement of our Federal Reserve Chair as some of the finest economic analysis you will find anywhere.
Here are some excerpts:
Consumer price inflation has been elevated so far this year, due in large part to increases in energy prices. Core inflation readings–that is, measures excluding the prices of food and energy–have also been higher in recent months. While monthly inflation data are volatile, core inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth. For example, at annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months. For core inflation based on the price index for personal consumption expenditures, the corresponding three-month and six-month figures are 3.0 percent and 2.3 percent. These are unwelcome developments….
Given recent developments, the medium-term outlook for inflation will receive particular scrutiny. There is a strong consensus among the members of the Federal Open Market Committee that maintaining low and stable inflation is essential for achieving both parts of the dual mandate assigned to the Federal Reserve by the Congress. In particular, the evidence of recent decades, both from the United States and other countries, supports the conclusion that an environment of price stability promotes maximum sustainable growth in employment and output and a more stable real economy. Therefore, the Committee will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.
This statement seemed to catch by surprise some of those who’d decided to label Bernanke as an “inflation dove.” But it shouldn’t have, because the philosophy is exactly the same as Bernanke expressed on February 15:
Inflation prospects are important, not just because price stability is in itself desirable and part of the Federal Reserve’s mandate from the Congress, but also because price stability is essential for strong and stable growth of output and employment. Stable prices promote long-term economic growth by allowing households and firms to make economic decisions and undertake productive activities with fewer concerns about large or unanticipated changes in the price level and their attendant financial consequences. Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability in output and employment…
The “inflation dovers” at the time counseled, “yeah, yeah, he’s just saying that, he doesn’t really mean it.” The news to them is that, insofar as incoming data may signal an increase in the public’s inflation expectations, the Fed is actually going to do something about it. But I’ve been telling Econbrowser readers all along that this man says what he means and means what he says. Anybody who claims otherwise just doesn’t know him.
Also getting attention yesterday were these statements from the new Fed Chair:
Consumer spending, which makes up more than two-thirds of total spending, has decelerated noticeably in recent months. One source of this deceleration is higher energy prices, which have had an adverse impact on real household incomes and weighed on consumer attitudes. As had been expected, recent readings also indicate that the housing market is cooling, partly in response to increases in mortgage rates….Gains in payroll employment in recent months have been smaller than their average of the past couple of years, and initial claims for unemployment insurance have edged up.
ABC News quotes this curious reaction from one analyst:
Barry Hyman, equity market strategist with EKN Financial, said the Fed chief is describing an economic situation the market doesn’t want to hear. “Being inflation-vigilant when you’re acknowledging an economic slowdown is not what investors want,” he said. “That scenario borders on stagflation, which is a death sentence for equities should it occur. It’s clear that the market is due for more corrective behavior.”
This is something investors “didn’t want to hear”? But let’s start here– isn’t it true? Would investors prefer to have a Fed Chair who either fails to see, or pretends to fail to see, what should be apparent to anyone with open eyes?
I sure don’t. I’m thankful we have a Fed Chair who understands very clearly that at this particular moment,
monetary policy must be conducted with great care and with close attention to the evolution of the economic outlook as implied by incoming information.
It is indeed a precarious moment. Fortunately, we have one of the smartest people there is at the helm. And he understands exactly what’s at stake here.