One thing I learned from watching Fed Chairman Ben Bernanke’s precedent-busting news conference is that reporters ask better questions than some congressional committee members. While the questions—regarding inflation, the dollar, gas prices and unemployment—were no more surprising than the answers, they did succeed in getting the right issues on the table (I noted that Bernanke sat at a professorial desk rather than standing at a lectern). His answers revealed that the central bank recognizes the limits of its power to influence events.
Start with gas prices. I guess Bernanke read my last blog because he recognized that although high fuel prices hurt people, the Fed can’t do much about it. What would we want them to do, anyway — clamp down on the economy to drive down prices that are hurting the economy? That would hardly make sense. What about raising rates to support the dollar and bringing down commodity prices via the currency channel? Higher interest rates would support currencies in the short term, but if higher rates weakened the country’s competitiveness, the economy would contract and the dollar would fall again. As Bernanke implied, we’re past the era of the Maestro, and the Fed can’t fix everything.
How about inflation? Again, Bernanke must be reading my blog (Hi, Ben) because he got right to the subject of last week’s issue. If inflationary expectations begin to rise from today’s reasonably contained levels, the Fed will tighten policy. Moreover, he predicted that people will start worrying more about inflation when the employment situation starts looking better. In other words, we’re back to the old fashioned idea of taking away the punchbowl before the party gets out of control. As I stated last week, I hope he or his successor has the courage and political support to do so. Fighting inflation is the one thing a central bank can take full responsibility for.
In sum, there wasn’t much news. He reiterated that the economy is growing, if sluggishly; inflation isn’t a problem, yet; and deflation is last year’s problem. So far, so good. The hard part is what lies outside of the Fed’s realm. Being able to afford the world’s prices for goods and services (gasoline and beyond), having a currency that the world readily accepts as a store of value, and maintaining our purchasing power in an increasingly competitive world are matters that the Fed may influence but can’t control. That’s where the rest of us come in.