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Bernanke Speaks! Fed Chair Defends QE2, Says Inflation Not His Fault

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

Hours after the FOMC released a policy statement that was largely as expected, Ben Bernanke held a historic press conference notable for the chairman's comments about the economy, inflation and QE2.

"Most of the slowdown in the first quarter is viewed by the committee as being transitory," Bernanke declared, a day ahead of a first-quarter GDP report that is expected to show U.S. growth slowed below 2%.

"All I can say is while the recovery process looks likely to continue to be a relatively moderate one compared to the depth of the recession, I do think that the pace will pick up over time," Bernanke said. "I am very confident that in the long run the U.S. will return to being the most productive, one of the fastest growing and dynamic economies in the world."

But in the meantime, the Fed also announced it's downgrading its 2011 GDP forecast to 3.1% to 3.3% from 3.4% to 3.9% previously, while upgrading its core inflation estimates to 1.3% to 1.6% from 1% to 1.3%. (Did somebody say "stagflation"?)

Defending QE2, Watching Inflation

Regarding QE2, the FOMC said it plans to reinvest proceeds from its securities holdings and complete the $600 billion QE2 program by June 30, as expected.

During the press conference, Bernanke defended the policy, which has come under criticism for hurting the Fed's credibility (and the dollar) while doing very little to boost the economy.

"We saw increases in stock prices. We saw reduced spreads in credit markets. We saw reduced volatility," Bernanke responded. "We saw all the changes in financial markets and quite significant changes one would expect... Indeed we saw the same type of financial responses in the first round which began in March of 2009."

While the FOMC wouldn't rule out additional quantitative easing, Bernanke asked and answered the rhetorical question 'Why not do more?' by declaring: "The trade-offs are getting less attractive at this point."

Specifically, those 'trade-offs' include higher inflation expectations, which Bernanke admits have risen "fairly significantly" in the short term.

Should inflation — and inflation expectations — become "unmoored" and rise in the medium-term as well, "the employment loss in the future would be quite significant," the chairman said.

The challenge here is the Fed — at least publicly — believes inflation pressures will prove "transitory" and largely the result of higher energy prices which it believes are up because of increased demand from the emerging markets and unrest in the Middle East and North Africa.

"If the situation stabilizes in the Middle East, that will provide relief on the inflation front," Bernanke said.

In other words, Bernanke is sticking to his story that the Fed's extraordinary actions and exceptionally low interest rates -- which the FOMC reiterated it will keep "for an extended period" -- are not responsible for rising commodity prices. (Keep moving people! Nothing to see here.)

Suggesting traders are looking past the Fed, financial markets resumed their recent trends in the wake of Bernanke's presser: Stocks rallied while the dollar hit at 16-month low, which gave a boost to commodities such as oil and precious metals. Treasury prices fell sharply, after rallying ahead of today's events.

In the accompanying video, I discuss Bernanke's comments and the Fed's statement with Yahoo Economics editor Dan Gross, who was in attendance.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com