Bernanke’s World And Ours Too
Raymond James
By Scott J. Brown
May 2, 2011
There were no fireworks at Fed Chairman Bernanke’s first post-FOMC press briefing. For the financial markets, it was a straight-forward and relatively dull outing. It reinforced prior notions, but we did learn a few things.
All five Fed governors and 12 district bank presidents contributed revised forecasts of growth, unemployment, and inflation last week. The central tendency forecasts exclude the three highest and three lowest projections. Fed officials lowered their outlook for GDP growth this year, but not by a lot, reflecting a slower than anticipated rate of growth in the first quarter. Unemployment is expected to decline gradually. Inflation will be higher this year, but the Fed continues to expect that commodity price pressures will be transitory. The Fed’s long-term goal for inflation has 2% as the upper limit.
2011 2012 2013 longer run Real GDP 3.1% - 3.3% 3.5% - 4.2% 3.5% - 4.3% 2.5% - 2.8% Jan. Proj. 3.4% - 3.9% 3.5% - 4.4% 3.7% - 4.6% 2.5% - 2.8% Unemp. Rate 8.4% - 8.7% 7.6% - 7.9% 6.8% - 7.2% 5.2% - 5.6% Jan. Proj. 8.8% - 9.0% 7.6% - 8.1% 6.8% - 7.2% 5.0% - 6.0% PCE Prices 2.1% - 2.8% 1.2% - 2.0% 1.4% - 2.0% 1.7% - 2.0% Jan. Proj. 1.3% - 1.7% 1.0% - 1.9% 1.2% - 2.0% 1.6% - 2.0% Core PCE 1.3% - 1.6% 1.3% - 1.8% 1.4% - 2.0% Jan. Proj. 1.0% - 1.3% 1.0% - 1.5% 1.2% - 2.0%
Bernanke said “the substantial ongoing slack in the labor market and the relatively slow pace of improvement remain important reasons that the FOMC continues to maintain a highly accommodative monetary policy.” That doesn’t mean the Fed is relaxed. Officials will continue to monitor inflation expectations and possible second-round effects from higher oil prices.
Bernanke gave no indication that short-term interest rates would be heading higher anytime soon. Asked to define what constitutes “an extended period,” he did not suggest any specific time period, but noted that it’s conditional on resource slack, a subdued trend in underlying inflation, and stable inflation expectations. “Once we move away from those conditions, that’s the time we need to begin to tighten.”
When asked about the impact of the end of the Fed’s asset purchase program, Bernanke repeated that the $600 billion program will be completed at the end of the current quarter, “without much tapering,” adding that, in the Fed’s view, “the end of the program is unlikely to have significant impacts on the financial markets or on the economy.” The end of the program has been well advertised. Moreover, the Fed has what’s called a stock view of the effects of securities purchases – “what matters primarily for interest rates, stock prices, and so on is not the pace of ongoing purchases, but rather the size of the portfolio the Fed holds.” At this point the Fed intends to keep the size of its portfolio unchanged by reinvesting maturing securities into long-term Treasuries. At some point, the Fed will stop such reinvestments, which will be a tightening of monetary policy.
Asked about the impact of higher gasoline prices on growth and inflation, Bernanke admitted that there was not much the Fed could do about gasoline prices – “at least, not without derailing growth entirely, which is certainly not the right way to go.” After all, Bernanke said, “the Fed can’t create more oil.” What the Fed can do, he said, is to try to keep higher gasoline prices from passing through to other prices and wages, “creating a broader inflation which would be more difficult to extinguish.” The Fed anticipates that gasoline prices will stabilize or even come down, but will continue to watch developments carefully.
What about the possibility of further asset purchases down the road? Bernanke has been criticized by some for not doing enough to reduce unemployment. Bernanke countered that the Fed has already done a lot, including all the extraordinary policy steps it took during the financial crisis and two rounds of asset purchases. Bernanke emphasized that the Fed also has to worry about inflation. “If inflation expectations become unmoored and inflation were to rise significantly, the employment loss in the future would be quite significant.” That justification did not appease the Fed’s critics. It’s a judgment call.
The bottom line is that the Fed doesn’t expect to tighten anytime soon (hence, a softer dollar) and it doesn’t expect to ease monetary policy either (no QE3). Future monetary policy decisions will depend on the evolution of the outlooks for unemployment and inflation, but there’s nothing on the immediate horizon to trigger any change in the near term.
(c) Raymond James
