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Bernanke At The Punchbowl Ready To Pour Us All Another Round, Inflation Not An Issue

James Groth
August 26, 2011, 3:00pm

"The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus…and [it] is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability,” proclaimed Fed Chairman Bernanke in his speech at the Jackson Hole annual meeting of monetary policy experts this morning. 

Bernanke's announcement confirmed his commitment to the markets, hopefully silencing the pundits who warn us constantly that the Fed doesn’t have any bullets left in its gun or tools left in its tool belt. Claiming that inflation expectations remain stable, Bernanke remains locked and loaded, tools at hand, inviting us all to the punchbowl.

Where to begin?

In an article Wednesday, we pointed to the fact that Fed policy is directly causing the living standards of most Americans to decline and is eroding their purchasing power. Continuing current policy only exacerbates this trend of rising commodity prices, a declining dollar, and lower incomes. After today’s speech, it appears that will be the likely course going forward. Bernanke said today that monetary policy must be responsive to changes in the economy; however, despite being aware of the threats and dangers of monetary policy induced inflation, he continues to ignore this major change.

From the speech:

"The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability. Low and stable inflation improves the functioning of markets, making them more effective at allocating resources; and it allows households and businesses to plan for the future without having to be unduly concerned with unpredictable movements in the general level of prices."

He goes on to claim:

"Commodity prices have come off their highs, which will reduce the cost pressures facing businesses and help increase household purchasing power."

Really? From their high, commodity prices, as measured by the CRB CCI Index, have only fallen a little over 4 percent. Keep in mind that since the Fed began its first quantitative easing program, commodity prices have risen over 90 percent. A 4 percent decline after such a huge run-up is nothing more than a slight and insignificant correction, yet Bernanke is factoring it in as a major contributor to growth later this year.

He says:

"Temporary factors, including the effects of the run-up in commodity prices on consumer and business budgets… were part of the reason for the weak performance of the economy in the first half of 2011; accordingly, growth in the second half looks likely to improve as their influence recedes."

He concedes that the 90 percent run-up in prices were a cause of the weak economic performance the U.S. has experienced. I heartily agree. But he then goes on to say that a 4 percent decline will likely contribute to growth by the end of the year. Using that logic, I would not be surprised to see those projections proven wrong by Christmas time.

Bernanke has been saying that inflation remains subdued throughout the entire run-up and clearly he will continue to reiterate as such based on today’s speech.

He continues:

"With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate."

All one has to do is look at the following two charts to understand that the Federal Reserve through its policies is creating inflation, raising the costs of businesses and families, and stalling a recovery. The first chart shows the S&P 500 vs. the CRB CCI Index from 1979 to 2001, a period of exceptional growth and expansion with an overall deflationary trend in prices. This was a period of relative hands-off for the Federal Reserve. 


Compare that to this second chart which shows the same relationship over the last decade of extraordinary Fed intervention. It is quite evident of their destructive affect.

If that causes alarm and concern, Bernanke’s closing sentence should at least make you laugh:

"The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability."

See the whole speech from Bernanke here.


James Groth is Research Associate


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