Sunday, December 5, 2010

Bernanke on 60 Minutes

You can see Bernanke's 60 Minutes interview here. Not much new here, but one thing of note. Bernanke says that the fear of inflation from QE2 is "overstated." Further, he says that the notion that QE2 involves printing more money is "a myth." What the Fed is really up to, according to him, is "lowering interest rates by buying Treasury securities." Maybe these comments were lifted out of context, but of course this is not correct. If we take "printing money" to be the issue of outside money, then that is exactly what the Fed has to do to purchase Treasury securities, as we all know. Bernanke could have explained some of the subtleties of what potentially happens to the increased stock of reserves that the Fed exchanges for long-maturity Treasuries, but that's certainly not what came across in the interview.


  1. Bernanke says he is "100% certain" that he will not let inflation rise. Really? I could paint a plausible "QE3" scenario where a faster Chinese reval (to counteract 6% domestic inflation) and $120 oil lead to 3% 5yr TIPS inflation expectations. Meanwhile, with 2-2.5% gdp growth, unemployment stays near 9%. What would the Fed do? Tighten to restrain inflation expectations when unemployment is that high? Of course not.

    The Fed is embarking on a policy with no "Plan B" should the dollar and commodities produce higher inflation, other than to argue, in the future, that "headline" inflation is not predictive of future inflation. Unfortunately, the TIPS market may not see it the same way.

    It strikes me that, even in our democracy, no one gets to ask the Fed the simple question: "what would you do if inflation rises and unemployment is still high?"

  2. Anon1:

    Yes, I'm pretty much in agreement with that.

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