Monday, November 14, 2005

Bernanke goes before banking panel

Inflation too high: Bernanke
WASHINGTON (Reuters) -
Federal Reserve Chairman nominee Ben Bernanke said on Tuesday U.S. headline inflation was currently above rates desirable in the long run but focusing on the long-term trend was most important for monetary policy.

In explaining why he favored the Fed adopting a long-term inflation "objective," Bernanke told the Senate Banking Committee that it was important to look beyond short-term volatility in inflation rates.

"The inflation objective is explicitly a long-term or medium term objective," said Bernanke. "It focuses on, for example, core inflation to avoid getting involved in short-term fluctuations in energy prices and the like."

"My principal concern at that point would not be that inflation had temporarily risen above its normal range -- for example current inflation is above the range that in the long-run would be desirable," he said. "But the concern would be that expectations about inflation going a year or two into the future had become unhinged or unanchored."

Bernanke said naming a range for desired long-term inflation "doesn't change the underlying dynamic."

"It's only an attempt to perhaps provide a bit of additional confidence, a bit of additional assurance or a bit of additional certainty to the markets about the Federal Reserve's long-term objective."

Sorry that I put the whole article here, but since yahoo links only work so long and the article was not too long I put it here.
To sum this up, Ben feels that inflation is a long to mid term problem that is above what the level should be. He uses the core CPI index to peg the inflation rate to avoid seasonal as well as volatile changes in the rate due to energy and food prices.
In the long run core inflation rate tends to go toward the general CPI, it can still deviate in the short run as here shows:

The below is from MarketWatch with title above as the link.
Bernanke goes before banking panel
Tuesday hearing should precede easy confirmation
By Rex Nutting, MarketWatch
Last Update: 4:42 PM ET Nov. 14, 2005

WASHINGTON (MarketWatch) -- Ben Bernanke appears headed for easy confirmation as Federal Reserve chairman, but not before he endures a day of tough questioning at the Senate Banking Committee.

The senators will hear from Bernanke on Tuesday about his views on the current economic situation and how he would lead the single most powerful economic institution in the world.

For financial markets, the most pressing matter is the near-term course of interest rates. The Fed has boosted its target for the short-term federal funds rate at 12 meetings in a row from 1% to 4%.

When will the tightening stop?

Markets won't like what they'll hear. More rate hikes are coming.

"Most of the pressures still lie on the side of further tightening," said Bill Dudley, chief economist for Goldman Sachs.

Given his reputation as something of a softie on inflation, Bernanke could use the hearing as a forum for rebuilding his credibility as an inflation-fighter. See related story.

For those with a longer view, the hearing will provide an opportunity for Bernanke to set out his vision of how the central bank should conduct monetary policy, and bank supervision and regulation.

Bernanke, 51, has breezed through the confirmation process twice before. The former chairman of the Princeton Economics Department served as a governor on the Fed board for three years from 2002 until earlier this year, when he moved to the White House as chairman of the Council of Economic Advisers.

Members of the committee seem disposed to approve Bernanke. "I think it will be a relatively easy confirmation," said Sen. Charles Schumer, D-N.Y. after meeting with Bernanke last week.

Senator Jack Reed, D.- R.I. said Bernanke faces no roadblocks.

"I think it will be rather smooth," Reed told reporters on Monday.

"My guess is that this is a non-controversial nomination. I would assume this would go quite quickly," he said.

Sen. Jim Bunning, R-Ky., said he would vote against Bernanke, as he has done twice before in lonesome dissents. Bunning complained that Bernanke hasn't shown enough independence.

Once the committee votes, probably later this week, the nomination would move to the full Senate. A simple majority would be required.

Bernanke has been nominated to take Alan Greenspan's seat on the board beginning on Feb. 1. The term lasts 14 years.

Inflation targeting

As an academic and as a Fed governor, Bernanke favored greater openness in Fed communications. By explaining its goals and tactics clearly, the central bank can avoid policy surprises that keep markets from functioning efficiently, he has argued.

The Fed has become much more transparent in the past decade under Alan Greenspan's regime. The committee now announces its policy changes and explains them in a short statement following meetings. Summaries of the meetings are released three weeks later. Complete transcripts of meetings are released with a lag of five years.

Bernanke wants to go further. If the Fed were to formally adopt and announce a target for inflation, markets would have a clearer understanding of the Fed's policies.

In its simplest incarnation, inflation-targeting could mean policymakers would follow a set rule: If inflation rises above the target of, say 2%, raise rates. If inflation falls below the target, cut rates. See earlier story on inflation targeting.

Such inflation targeting has been resisted firmly by Greenspan and others at the Fed, although similar methods have been adopted at most other central banks, including the Bank of England, the European Central Bank, and banks in Canada, Australia and New Zealand.

Critics object to a mechanistic approach to policy, figuring that the Fed must remain flexible to respond to crises.

On the Hill, lawmakers have objected to any retreat from the Fed's dual mandate of low inflation and maximum employment.

But Bernanke has rejected those criticisms of his ideas. Inflation targeting needn't reduce flexibility to act in a crisis.

Bernanke favors a policy of "constrained discretion." The Fed would be constrained by its inflation target but would have discretion to react to temporary hiccoughs in the economy.

Under Bernanke's form of inflation targeting, the Fed would react not to past inflation but to future expected inflation.

"Bernanke's speeches suggest a predilection for activist, pre-emptive policy -- in either direction -- to keep inflation expectations from drifting too far from the Fed's target," Dudley said.

Nor would inflation targeting supersede federal law that requires the Fed to maximize employment, Bernanke has said.

After all, the Fed long ago decided that maximizing employment cannot be a short-term goal. Fed officials from Paul Volcker to Greenspan to Bernanke have said the only way to maximize employment in the long run is to keep prices stable.

Any move to a formal inflation target would be a slow process. While half of the Fed presidents favor a more explicit numerical target, most of the Fed governors do not favor the change.

Fiscal policy

Bernanke will have to navigate a trick minefield when the questions turn to the touchy terrain of fiscal policy, which is under the purview of Congress and the White House, not the Fed.

How much should the Fed chairman get involved in tax and spending debates? Greenspan rarely passed up an opportunity to talk about subjects far afield of monetary policy, including taxes, spending, Social Security reform, immigration, education, and trade.

Democrats still fume when they remember how Greenspan endorsed President Bush's first tax cut on the ground that the government was in danger of running persistent surpluses.

Given his current job as one of Bush's economic advisers, Bernanke will be under pressure from the senators to show his independence from the White House.

In his speeches as a governor, Bernanke rarely strayed from monetary policy. But as chairman, he'll be asked for his opinions about every issue with even the slightest connection to economics.

Schumer said Bernanke had promised him that fiscal policy and other issues wouldn't be off limits. "He understood that the role of Fed chairman was to talk about the other side of the economic ledger."

Bernanke's political and personal skills will be tested at the hearing. "We can expect politically motivated and occasionally nasty questions," said Mickey Levy, chief economist for Bank of America.

As a career teacher, Bernanke should be used to the sorts of questions he'll be asked on Tuesday and over the next 14 years: Frequently obsequious, occasionally provocative, at times off-topic and often just plain stupid.

Again I put the whole article here.
The most interesting aspect of Bernanke's nomination is that it is treated as so mundane. While the Supreme Court nominations can cause fillibusters and every political action committee to become overactive, quite possibly the most powerful man in the world is nominated with so little press.

In response to some of the issues by Roger Nusbaum, I wanted to talk about them here.
No I have not seen the testimony of Bernanke before the Senate but even the above article states:"Frequently obsequious, occasionally provocative, at times off-topic and often just plain stupid." So I can imagine how silly their questions can be, and shows how the testimony was not even repeated on C-Span but protests of ANWR was on for three days.

As far as Roger Nusbaum's comment on "Ahem, socialism", I do agree with the sentiment but it is a complicated question. From my study in international economics, the US has been in the enviable position as being the currency of international trade. As a result most countries use the US as reserves for their current account. This basically results in most of the rest of the world subsidizing our way of life in the USA.

While I would say we are more of a free market, we still have one theory of Marxism/Socialism. Marx was a strong believer in that every able body person should be given a job. Unlike most economic theories of work as being a disutility (less consumption is better than more), Marx felt that a person derived self-satisfaction from work.

These ideas are manifested in the Fed’s role of maximizing employment, while maintaining low levels of inflation. Contrasted with most European countries allowing up to 12% unemployment with more of a social safety net for societies better or worse condition. We can see that some of the French riots would indicate that the US has a better social contract.

To maintain the low unemployment rates, the Fed considers long term stable prices as the primary tool for this approach. But in addition to trying to keep prices stable but also the Fed is to keep inflation low. So the Fed’s dual mandate is the goal of low inflation and maximum employment. Much has changed in our perception of what a central bank can do since my studies in economics in the mid 80's. Economist felt that there was a direct trade-off between employment and inflation, similar to a risk -reward tradeoff. Lower unemployment was to mean higher inflation and higher unemployment meant lower inflation.

These policies with a more openness should be good for markets. Bernanke believes correctly that uncertainty and suprises in the markets prevents from them working most efficiently.

The policy of forward looking or expected rate of inflation is a good idea as long as the information that this is based on is unbiased. By telling the markets ahead of time which direction the Fed is targeting allows the market to adjust expectations to reality. Markets tend to self fulfill prophecy. If a majority of consumers feel that a recession is coming, then they cut back on purchases. This cutback then leads to business to see a drop in demand and as such will produce less. And finally business cut back employment and the result is a recession!

Of course Bernanke will need to address fiscal issues and any other economic issues the Senate is caught up with at the time. I hope that Bernanke can create vague enough language and politically correct enough to not have him land in a tribal war between the two political parties. In hindsight it seems funny to think that the Federal government was going to have persistent surpluses. I remember that several economists stating that the Fed's role would be severely hampered if there was no debt to use in the open market functions. So Greenspan was not perfect as some predictions of problems in the future.

I am pretty optimistic about the US economic power for at least 40 years. India's labor force is 60% in agriculture and as such it will take at least one generation to start to transfer the work force to other industries. The US took at least 2 generations and had an immigrant population that filled the new jobs in industry. Also for example the current account deficit does not worry me because at 6% of yearly GDP, would mean that a family having a credit card bill of 6% of yearly income. This would mean he could pay off his credit card bill by putting 1% of his pay per month for 6 months.

The globalization questions I hope to answer in other posts. Thanks.

Links of interest:
by Jim Puplava,Storm Watch Update,June 24, 2005

More on the "Missing Inflation"
Random Roger's Big Picture
CPI readings top expectations
Does High Employment Mean Inflation?


Blogger Roger Nusbaum said...

The point about the US having imigrants to help ascend is a great point that I've never thought of before.

11/20/2005 5:28 AM  

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