Interest Rate Roundup

Wednesday, June 04, 2008

Bernanke jawboning on inflation ... again

Fed Chairman Ben Bernanke is speaking at Harvard University today. His remarks on the similarities and differences between 1975 and now were just released. It looks like he is -- once again -- ratcheting up his anti-inflation rhetoric. The most important passage, as far as I'm concerned, is the following one ...

"For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980. Moreover, the increase in inflation has been milder this time--on the order of 1 percentage point over the past year as compared with the 6 percentage point jump that followed the 1973 oil price shock. From the perspective of monetary policy, just as important as the behavior of actual inflation is what households and businesses expect to happen to inflation in the future, particularly over the longer term. If people expect an increase in inflation to be temporary and do not build it into their longer-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly. Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve. We will need to monitor that situation closely."

Bernanke notes that we don't have evidence of a wage-price spiral like we did in the 1970s. But clearly, he is expressing more concern about inflation now than we were hearing several weeks ago.

Treasuries aren't getting the warm and fuzzies from Ben's comments. Bond futures took a late day tumble, and were recently down 1 3/32 in price. Ten-year yields are up by about 9 basis points. Also notice how oil and the dollar are reacting: Crude is falling and the dollar is rallying a bit.

I've been saying for a while that if Fed policymakers really want to do something about rising commodity prices, they should start by looking in the mirror and recognizing that they are part of the problem. Their negative real interest policy has been a key contributor to the recent run up in prices. Note my chart above, which graphs the nominal funds rate against crude oil futures prices. Maybe Bernanke's recent comments signal that they are starting to "get it." One can only hope.


  • let me guess, the FED's formula for calculating inflation excludes fuel and food. what cooked up calculation are they using anyways?

    By Anonymous Mike, at June 4, 2008 at 3:21 PM  

  • Ever since Helicopter Ben took over, he has talked about inflation expectations rather than actual inflation. And that is what they are trying to contain by moving their lips.

    Unfortunately, in spite of their efforts (and the sharp correction in Oil), inflation won't be contained. My guess is that sooner rather than later, he will have to defend those words with action. Unfortunately, he will try to drag his feet as long as possible.

    Those who think we'll see stagflation are probably wrong. We'll see something much worse - inflationary recession before seeing the deflationary phase.

    By Blogger shankar, at June 4, 2008 at 4:45 PM  

  • Mike,

    The best way to control inflation expectations is to control actual inflation.

    Only an out of touch academic could miss this obvious point.

    We need pay less attention to wall street and more attention to main street.

    By Anonymous MAB, at June 4, 2008 at 10:30 PM  

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