Bernanke Excerpt:Equally Uncmfortable with 1% Or 3% Inflation

Author: Market News International | Category: News

WASHINGTON (MNI) – The following is an excerpt from Federal Reserve
Chairman Ben Bernanke’s semi-annual hearing Q&A session Wednesday for
the House Financial Services Committee:

BERNANKE: Well there is certainly a theoretical limit which is the
fact that the Federal Reserve can only buy treasuries and agencies, and
moreover quantitative easing typically involves buying longer term
treasuries and agencies as opposed to bills for example. So there are
finite amounts of that available, and moreover, beyond a certain point
if the Federal Reserve owned too much it would greatly hurt market
functioning and have the effect of reducing the efficacy of the policy.
So I wouldn’t say we are at that point yet, but ultimately there would
be some limit to how much we could do. We still have some capacity at
this point.

[On Inflation]

If for whatever reason, and we have seen for example in the last
few years oil shocks which have driven inflation up to 3% or higher.
Thats not a good situation, and its our objective, in that case to try
to move inflation gradually down to 2%. So if you are asking if we would
target 3% the answer is no.

[When asked if he is more comfortable with 1% or 3% inflation]

I think both of those are concerns because 3% of course means we
are moving towards a more inflationary situation, but 1% is closer to
the deflation range which is also not healthy for the economy.

I recognize that some people would advocate that we set an
inflation target at, say 4% and to maintain that for a number of years.
I don’t think that first, we could do that without losing control of the
inflation process. Secondly I am very skeptical that it would increase
confidence among businesses and households and increase economic
activity. I think it would create alot of problems in financial markets
as well. I don’t that it is a strategy that has alot of support on the
Federal Open Market Committee. We have maintained inflation near 2% for
a long time, and there is alot of confidence in financial markets that
the fed will keep inflation close to 2%.

The issue is that we currently have very well anchored inflation
expectations. People are strongly accustomed to 2% inflation. If we were
to say four, first there would be the issue of getting there. Could we
get there with some accuracy, and beyond that people would say, well why
not six, why not eight? So in the short run at least its not at all
clear that people would be confident that this new target of 4% would be
stable and sustainable. Instead they would wonder where inflation would
be in the near term.

** MNI Washington Bureau: (202) 371-2121 **