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Bernanke: You All Settle Down and Maybe I'll Lower Rates

Speaking at a National Bureau of Economic Research conference today, Fed Chairman Ben Bernanke discussed the link between the public's inflationary expectations and the Fed's interest rate policy.

"Undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank's ability to achieve price stability," Bernanke said in a mostly academic speech to a conference of the National Bureau of Economic Research.

If investors, consumers and businesses feel confident that the Fed will keep prices stable, the Fed chief suggested, they may be less inclined to act in ways that could aggravate inflation. Bernanke also said that these groups may be less inclined in such circumstances to worry that inflation will eat away at investments and paychecks, and might feel better about longer-term financial planning.

One really nice way the Fed could help quell inflation worries (and the resulting, self-fulfillingly inflationary effect) would be to lower its interest rate target.  After all, if Uncle Ben's sanguine enough to take his foot off the brake, why shouldn't we be?  But he's unlikely to do that unless and until the FOMC sees (as phrased in its most recent policy statement) a "sustained moderation in inflation pressures" which is "convincingly demonstrated."  And since Bernanke sees public perception of inflation as a key inflation pressure, we're left somewhat deadlocked.

Bernanke wants to see a moderation in inflationary pressures (including the public's fear of inflation) before lowering rates, a move that would - by virtue of indicating the Fed's own comfort with the inflationary outlook - soothe the public's inflationary expectations.  It's a virtuous cycle just waiting to be triggered, which must be frustrating to anyone stumping for a rate cut.  Even so, with the economy managing to hold onto its current, unusually long Goldilocks period of sustainable growth amid low inflation and low unemployment, it's hard to fault Bernanke for not wanting to rock the boat, even if it means delaying our eventual salad days of mutual confidence in price stability.

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Bernanke: You All Settle Down and Maybe I'll Lower Rates

Speaking at a National Bureau of Economic Research conference today, Fed Chairman Ben Bernanke discussed the link between the public's inflationary expectations and the Fed's interest rate policy.

"Undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank's ability to achieve price stability," Bernanke said in a mostly academic speech to a conference of the National Bureau of Economic Research.

If investors, consumers and businesses feel confident that the Fed will keep prices stable, the Fed chief suggested, they may be less inclined to act in ways that could aggravate inflation. Bernanke also said that these groups may be less inclined in such circumstances to worry that inflation will eat away at investments and paychecks, and might feel better about longer-term financial planning.

One really nice way the Fed could help quell inflation worries (and the resulting, self-fulfillingly inflationary effect) would be to lower its interest rate target.  After all, if Uncle Ben's sanguine enough to take his foot off the brake, why shouldn't we be?  But he's unlikely to do that unless and until the FOMC sees (as phrased in its most recent policy statement) a "sustained moderation in inflation pressures" which is "convincingly demonstrated."  And since Bernanke sees public perception of inflation as a key inflation pressure, we're left somewhat deadlocked.

Bernanke wants to see a moderation in inflationary pressures (including the public's fear of inflation) before lowering rates, a move that would - by virtue of indicating the Fed's own comfort with the inflationary outlook - soothe the public's inflationary expectations.  It's a virtuous cycle just waiting to be triggered, which must be frustrating to anyone stumping for a rate cut.  Even so, with the economy managing to hold onto its current, unusually long Goldilocks period of sustainable growth amid low inflation and low unemployment, it's hard to fault Bernanke for not wanting to rock the boat, even if it means delaying our eventual salad days of mutual confidence in price stability.