What I Wish That I Had Said on the DeLong-Posen-Rose "Foreign Affairs" Monetary Policy Conference Call
Siri!! "Prince Otto Von Bismarck", Not "Prince auto Von Bismarck"!!

Tim Duy Confuses Me...

But I don't think that is his fault: Ben Bernanke appears to have confused him.

Tim Duy:

Bernanke Takes a Dovish Stance: Federal Reserve Chairman Ben Bernanke traveled to the House today to deliver his final Monetary Report to Congress.  While he reiterated many of his previous comments surrounding quantitative easing and interest rates, Bernanke leaned on the dovish side of the equation… continues to emphasize the distinction between asset purchases and interest rates as well as the data dependent nature of both… leaves me less confident of a September taper. Such uncertainty, I think, is one of his objectives.

Bernanke suggests that economic activity is broadly consistent with the Fed's forecast…. But he quickly raises a red flag…. Bernanke's assessment of the labor market is also mixed…. Then comes the decidedly dovish inflation outlook…. And once again he dismisses the data…. But then he raises the specter of deflation…. If I had to say what surprised me the most over the past few months, it is that the tapering debate has proceeded so far and so long given below target and declining inflation rates. They are clearly placing considerable importance on a Phillips Curve view… otherwise they would have raised the pace of asset purchases at the last meeting rather than signal the end of quantitative easing.

Bernanke then muddles the risk to the forecasts.  He first reiterates the message of the last FOMC statement…. That's a lot of good news. But he rains on the parade…. Interesting emphasis on the downside risks, particularly given that during the Q&A Bernanke said that recent data had not yet altered his basic outlook. Definitely sounds like he wants to take some of the certainty out of the path of asset purchases… disabuse market participants of the notion that policy is calendar-based… continues to distinguish the Fed's policy tools and reiterate that policy remains accommodative even after the end of asset purchases…. That 7% trigger comes back into play…. I don't think we know where that 7% number came from…. Dovishly, Bernanke recognizes that financial conditions have tightened recently….

It seems that the Fed thought they were doing everyone a favor by signalling well in advance that policy was likely to shift…. Policymakers, however, appear to have forgotten--again, for something like the third time in the last four years--that even talking about tighter policy is the same thing as tighter policy….

Bernanke… emphasizes thresholds are not triggers… questions the conditions around the unemployment threshold…. Why does the same concern about labor force participation not hold for quantitative easing?  If raising rates due to falling labor force participation is premature tightening, then why isn't ending quantitative easing also premature?  And does anyone every wonder about these thresholds are in the first place?….

Bernanke accomplished what he set out to do: Push back against the idea that the Fed will raise rates anytime soon… policy will remain accommodative long after quantitative easing ends.

Bottom Line:  Bernanke continues to inject uncertainty regarding the path of asset purchases, while at the same time creating more certainty about the path of interest rates.  Altogether, part of his ongoing efforts to minimize the tightening that occurred in the run-up and aftermathath to the last FOMC meeting.  But at the same time, he said the data remain broadly consistent with the path he outlined at the meeting, suggesting that the general policy path he outlined in June remains in play, which means beginning to wind down asset purchases later this year.

Would not Ben Bernanke have better served himself and the economy if, this entire year, he had simply said, over and over again: "Our state-dependent policy reaction rule remains unchanged"? What is the additional value added here?