Bernanke’s surprising silence

October 15, 2010, 8:10 PM UTC

The Federal Reserve chief’s speech Friday is notable for what it didn’t say about how the Fed might pump up inflation.

As expected, Ben Bernanke focused on the case for another round of quantitative easing, in which the Fed buys Treasury securities with newly created dollars, reducing interest rates and pushing down the value of the dollar.


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But with the market widely expecting the Fed to go ahead in coming months with between $500 billion and $1 trillion of additional asset purchases, Fed watchers have been puzzling over what else the central bank might do to boost an economy plagued by high unemployment.

Some saw a breakthrough this week when the minutes of the last Federal Open Market Committee showed members discussed various methods the Fed might employ to raise inflation expectations.

Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP.

That discussion was noteworthy because it marks the first time the Fed has entertained policies beyond QE for easing the economy out of its funk. But modestly disappointing some observers, Bernanke chose not to elaborate in his comments at the Boston Fed Friday morning.

“There was no mention today that the Committee is considering ways that it might be possible to raise inflation expectations,” said Columbia University professor Michael Woodford. “And even the discussion of assurances that interest rates will remain low expresses skepticism about whether more can be said than they already have.”

The targets discussed in the August minutes aren’t the only tools the Fed might use to make it clear that it intends to allow inflation to rise from its currently low level, in a bid to ease the pressure on overleveraged consumers and businesses.

Woodford has been urging the Fed to be more explicit in saying it will continue to provide more stimulus till the economy reaches a certain level of health.

Bernanke did say Friday that FOMC members generally believe the Fed is obliged to keep inflation around 2% annually, compared with recent readings in the 1% range.

But he didn’t offer any further clarity on how the Fed might get inflation moving higher again, and some observers who contend Bernanke has been too restrained in treating a weak economy say that is what’s desperately needed.

“I was hoping we might have a bit of a follow-up discussion on the inflation expectations, to clarify some chatter,” said economist David Beckworth, who follows the Fed at his Macro and Other Market Musings blog. “The Fed could help move market expectations by creating explicit policy goals, but we aren’t seeing that yet.”