David Altig has a take at Macro Blog:
All of the five questions that Chairman Ben Bernanke addressed in his October 1 speech to the Economic Club of Indiana rank high on the list of most frequently asked questions I encounter in my own travels about the Southeast. But if I had to choose a number one question, on the scale of intensity if not frequency, it would probably be this one: “What is the risk that the Fed’s accommodative monetary policy will lead to inflation?”
The Chairman gave a fine answer, of course, and I hope it is especially noted that Mr. Bernanke was not dismissive that risks do exist:
“I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. …
“Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another. Determining precisely the right time to ‘take away the punch bowl’ is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools. I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions.”
“Price stability” must mean 2% inflation because that´s exactly the average over the past twenty years of both the Headline PCE and PCE-Core!
And Bernanke is pretty cocky to say he´s confident …Why, then, did he let things get so bad to start with? Why should I believe him when he says he can get it right? But I do! I´m pretty confident that if inflation goes above the 2.25% that Kocherlakota said was his “threshold” the FOMC will come ‘pounding down’ full force. That´s exactly what they did in 2008 when they got squeamish about the possible impacts of oil and commodities.
David Altig throws in his ‘wisdom’:
In each case, policy actions were generally taken in periods when the momentum of inflation expectations was discernibly downward. A simple-minded conclusion is that FOMC actions have been consistent with holding the bottom on inflation expectations. A bolder conclusion would be that as inflation expectations go, so eventually goes inflation and, had these monetary policy actions not been taken, the Fed’s price stability objectives would have been jeopardized.
Perhaps more pertinent to the current policy discussion, inflation expectations have, in fact, moved up following the latest policy action—which I guess people are destined to call QE3. But unlike the periods around QE1, QE2, and Twist, QE3 was not preceded by a period of generally falling longer-term breakeven inflation rates. So this time around there will be another, and perhaps more challenging, chance to test the proposition that monetary accommodation is consistent with price stability. As for previous actions, however, I’m pretty comfortable arguing the case that the price stability mandate was not only consistent with accommodation, it actually required it.
Get real. People are by now pretty sure Bernanke (FOMC) will not let inflation come down ‘too far from 2%, so no one will be expecting that, let alone the market as a whole. So the only way inflation could go is up. But the market also understands that inflation cannot detach itself ‘too far’ from 2%.
And that means all the ‘forward guidance’ being spread around is for nothing.
Update (10/11): Ed Dolan also comments:
So there is the paradox: The bigger the Fed’s balance sheet grows, the more it has to emphasize the efficacy of its exit strategy, but the more it talks about the exit strategy, the less real kick it gets out of further increases in its balance sheet.
How do we break out of this trap? Next question, please.