Hilsenrath: What Bernanke Means

In his prepared testimony to Congress, Ben Bernanke highlighted risks to the Fed's economic outlook. One of the concerns is that tight fiscal policy will restrain economic growth over the next few quarters by more than expected. The recovery still proceeds at a moderate pace and remains vulnerable to unanticipated shocks.

By Jon Hilsenrath
July 17, 2013, 8:31 AM
Wall Street Journal

1) WHAT HE SAID: “The risks remain that tight fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery. More generally, with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”

WHAT IT MEANS: Lots of focus on downside risks here, which is striking because the Fed said in its June policy statement that downside risks to the economy had diminished. That’s a slightly “dovish” tilt toward easy money.

2) WHAT HE SAID: “I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions-which have tightened recently-were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained longer.”

WHAT IT MEANS: Mr. Bernanke tries to be even-handed here about the outlook for bond purchases, but he spends a lot more time talking about the conditions that could convince the Fed to leave bond buying in place than he does on the conditions that would convince the Fed to pull back sooner than planned. Another dovish tilt.

3) WHAT HE SAID: “If a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the committee would be unlikely to view a decline in unemployment to 6.5 percent (unemployment rate) as a sufficient reason to raise its target for the federal funds rate. Likewise, the committee would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective.”

WHAT IT MEANS: The Fed has said it won’t raise the fed funds rate until after the jobless rate falls below 6.5%. These comments, along with others Bernanke has made, suggest the Fed could wait for a while even after the jobless rate falls below 6.5% before trying to raise short-term rates. The 6.5% threshold, it seems, appears to carry less and less meaning within the Fed as it tries to emphasize low rates for a long-time.

4) WHAT HE SAID: “The [Fed] is certainly aware that very low inflation poses risks to economic performance – for example by raising the real cost of capital investment—and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2 percent objective over time.”

WHAT IT MEANS: There seems to be a little shift in emphasis here. The Fed’s preferred measure of inflation is around 1%, below the Fed’s 2% goal. In his press conference in June, Mr. Bernanke emphasized his view that inflation has been driven down by “transitory factors.” Wednesday he seems to emphasize the damaging effects of low inflation , a little tilt toward keeping monetary policy easy.

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