Tuesday, October 02, 2012

Who's on first? The Bernank!

Our esteemed Fed chairman gave a widely hailed speech that was, on the key point at least, clear as mud.

Check it out:

In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn't mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve's commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend.

So which is it?

"Rates will be exceptionally low til at least mid-2015. "

or

"so long as price stability is preserved we will take care not to raise rates prematurely."

People, those are two very different guidances. Which (if either) did he actually mean and which is the dog whistle?

Well, since the first is a promise that Bernanke cannot actually keep (it's highly unlikely he'll be Fed chair in mid-2015), and the second is business as usual, I'd put my money on the second phrase as actually being closer to what will happen.

Then, he adds insult to injury with this gem: "We hope, by clarifying our expectations about future policy,...."

Not clarifying the path of future policy but his expectations about the path of future policy. Not that it will work, but that he hopes it will work.

Is Ben actually giving the middle finger to the expectations channel here? You wouldn't have to be a rabid Straussian to think so.



1 comment:

Joshua Wojnilower said...

He's seemingly trying to appease all sides while possibly dealing with questions about how successful their previous actions have already been.

Until the Fed proves it will not raise rates in the face of higher inflation, I see no reason to expect Bernanke or future Fed's will approach monetary policy differently. Maybe Bernanke believes a stronger recovery will not entail higher inflation, but that seems doubtful. The most likely outcome remains that growth and unemployment continue to underperform which allows the Fed to maintain rates at zero at least until 2015.