…either inflation or who´s responsible for the economy underperforming!
Shows a version of this chart.
Inflation is low and, according to every recent measure, it’s been falling. That’s pretty much all there is to it.
As to the question of how much (or even whether) this disinflationary trend will influence policy, it’s hard to say.
Bernanke suggested in his testimony earlier on Wednesday that he wasn’t so worried about it because inflation expectations have remained stable.
But that´s interesting, in particular because it´s not quite true; in fact over the last couple of months inflation expectations, both the shorter (5 years) and longer (10 years), have been trending down as indicated in the chart below.
It´s also interesting because back in 2008, as late as August, the FOMC was very worried about inflation expectations unmooring. The statement from the August 5 meeting reads:
Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Nevertheless, inflation expectations at the time of the August FOMC meeting were down significantly. (Note that 5 year expectation is more sensitive to oil/commodity price fluctuation). The chart illustrates.
In August 2008 Bernanke was worried about inflation expectations ‘taking off’, although they were coming down. Now, he´s not worried about inflation getting ‘too low’ because he thinks inflation expectations are stable, although in fact they have come down!
And the blame game goes on unabated:
Federal Reserve Chairman Ben Bernanke thinks Congress is doing quite a lot wrong. He headed to the Hill on Wednesday to present them with an itemized list.
“The expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year,” he said.
The Federal Reserve can offset some bad economic policy coming out of Congress, but not this much bad economic policy coming out of the Congress. “Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”
The result, as Neil Irwin writes, was an unusually blunt testimony from the central bank chief. He basically walked up to Congress and said, “You’re the reason the economy isn’t taking off more.”