‘Clinical Detachment’

In his presentation at a SF Fed Conference last Friday, Bernanke said this with a straight face behind a technical mask:

In discussing the role of monetary policy in determining the expected future path of real short-term rates, I have cheated a little: What monetary policy actually controls is nominal short-term rates. However, because inflation adjusts slowly, control of nominal short-term rates usually translates into control of real short-term rates over the short and medium term. In the longer term, real interest rates are determined primarily by nonmonetary factors, such as the expected return to capital investments, which in turn is closely related to the underlying strength of the economy. The fact that market yields currently incorporate an expectation of very low short-term real interest rates over the next 10 years suggests that market participants anticipate persistently slow growth and, consequently, low real returns to investment. In other words, the low level of expected real short rates may reflect not only investor expectations for a slow cyclical recovery but also some downgrading of longer-term growth prospects.

To me, what this means is that the Fed has been so negligent in the performance of its primary job of stabilizing the economy around ‘full employment’ that even longer term growth prospects are being downgraded!

PS: Chart 1 of Bernanke´s presentation remains true if you increase the number of advanced economies and extend the period back to 1990, as seen below: