Published May 6, 2011
William RutherfordWhen I published “Who Shot Goldilocks?” in 2004, I recommended that the Federal Reserve announce rate decisions by communicating in plain English at a press conference where the chairman could be asked questions. This was because of Alan Greenspan’s notoriously obfuscatory pattern. Seven years later, on April 27, Chairman Ben Bernanke held such a press conference.

Bernanke first read from a prepared statement and then took questions from reporters. As befits the U.S. Federal Reserve, reporters from around the world were in attendance. Questions were asked by reporters from the U.K., France and Japan. It was an event that Americans can be proud of as our central bank chairman set new standards for openness and transparency … with the entire world watching and participating.

Among the policy matters that the chairman discussed was the end of Quantitative Easing II, which will be completed by June 30. There will be no change in the present policy of reinvesting matured debt and interest into new purchases. But the $600 billion program of bond purchases by the Fed will come to an end.

Bernanke defended QE II in a strong statement. He said that at the time the program was begun, the U.S. was looking at a double dip recession and that it was on the cusp of deflation. It was necessary, he said, and it worked. The program triggered significant changes in the financial markets, and the easing financial conditions led to a stronger economy, just as the first quantitative easing effort had done in March 2009.

The chairman said there would be no change to the target range for the federal funds rate at 0 to 0.25 percent, and that economic conditions – including low rates of resource utilization and subdued inflation trends and stable inflation expectations – were likely to warrant exceptionally low levels for the federal funds rate for an extended period of time.

Thus he dismissed inflation, and focused on the weak economic recovery and joblessness at the expense of the dollar. All currencies rose against the dollar. Gold jumped $13.60 an ounce to an all time record high. Silver rose 2 percent. Oil and virtually all other commodities also rose. The Dow rallied.

It is clear that the dollar is the sacrificial lamb for the economy and unemployment. Even so, Bernanke did say that a strong dollar was in the interest of the U.S. and the global economy. He believes that the recovering U.S. economy will result in a strengthened dollar. He further stated that the dollar had risen when our financial crisis occurred because of its safe haven status, and we are now seeing the unwinding of that shift in investor sentiment.

Bernanke did not mention the increasing short position in the dollar or carry trade that allows investors to borrow dollars and buy foreign currencies, and thereby get higher interest rates and currency benefits.

The first quarter of 2011 had disappointing economic growth that caused the Fed to lower its GDP forecast for the year to 3.2 to 3.3 percent, down from 3.4 to 3.9 percent. End-of-year unemployment is expected to be 8.4 to 8.7 percent. Bernanke noted that 45 percent of the unemployed had been out of work for more than six months.

He further said that the longer that workers remain unemployed, the more likely they are to remain unemployed, and that unemployment creates more unemployment.

We are still 7 million jobs down from peak employment. Bernanke reiterated that the recovery was proceeding at a moderate pace, but that we had a lot more work to do. Even though the economy is recovering, it needs to sustain itself, suggesting that he still thinks the recovery is fragile. He said the Federal Reserve sees “quite a bit” of global uncertainty.

While inflation expectations are rising for the short term, Bernanke believes inflation expectations are stable for the medium term. The price of oil is affected by a declining supply caused by turmoil in the Middle East and North Africa, and rising demand from developing countries. Oil usage has actually declined in the U.S.

When asked about the S&P downgrading U.S. debt to negative, Bernanke mused aloud, why was that a surprise? “This was nothing new,” he said and added that he hopes this will provide incentive to the politicians in Washington to deal with the deficit problem. He repeatedly stated that the deficit is the country’s biggest problem and should be the highest priority for political leaders. So far he has not seen anything that makes him think prospects for deficit reduction are improving. The cuts so far have not had much effect on the deficit or the economy.

In my view, Chairman Bernanke gets A’s all around. He gets an A for holding the press conference, an A for giving straightforward answers in plain English, an A for making his thinking (and the board’s) clear and an A for presentation. He should get a standing ovation.

Originally posted in the Daily Journal of Commerce, Portland OR