Interest Rate Roundup

Tuesday, July 21, 2009

Bernanke on exit strategies

Interesting timing, to say the least. As "Helicopter" Ben Bernanke heads to the Hill for a couple days of grilling, the Wall Street Journal is publishing an op-ed from the Fed Chairman about "exit strategies." Bernanke tries to lay out the case that the Fed will pull back on all its extraordinary accommodation when and if it makes sense to do so. But as he adds in his conclusion (below), that isn't going to happen any time soon ...

"Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability."

What do you think? Do you think Bernanke will really live up to his word? Or do you think we'll end up with another disaster like Greenspan's too little, too late hiking strategy in 2004-2005 (which helped ignite the final leg in the housing bubble)?

2 Comments:

  • I don't know why this guy gets any credibility. If you track his record it is very bad. Not that he necessarily is a liar. It is more a matter of talking his book. He will say what he thinks will garner confidence in the system. The ultimate example is "subprime is contained"!

    By Blogger Marxist, at July 21, 2009 at 8:11 PM  

  • Inflation will flare up like an ulcer when the economy returns to growth. Now, I think the big question is: will Bernanke have the courage to raise rates as high as Volcker did if inflation gets out of control? By this time next year, when all the stimulus cash has made its way to consumers and businesses, there's going to be extraordinary amount of money sloshing around the economy, and I think it will take considerable time and effort to sop it all up. Fed funds target @ 12%? Not too far fetched, IMO.

    And if Bernanke is replaced, will Larry Summers have the courage (assuming, of course, that Barack Obama will pick Summers to replace him if Bernanke bows out.)

    They both will, IMO, because even the folks who criticized Volcker back in the early eighties now understand that breaking inflation was the right thing to do, no matter how high rates had to go.

    So, I say, be prepared to stop borrowing by next year. Payoff those credit cards, and that mortgage, if you can. Short- and long-term rates will be outrageous. Yep.

    By Anonymous Prime Rate, at July 23, 2009 at 1:25 AM  

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