Federal Reserve Chairman Ben Bernanke gave his first ever press conference a little more than one month ago. The Fed has been under fire lately for maintaining the Fed funds interest rate at 0% and for its program of “quantitative easing” (QE2). For critics of the Fed, this press conference was more bad news, though not unexpected.
Bernanke announced that the Fed will be leaving interest rates where they are. That monetary policy is worrying many people though. Commodity prices have been rising sharply in the last few months, which many see as a direct result of easy money coming from the Fed. What did Bernanke have to say about inflation?
Amazingly the Fed’s medium to long-term projection for inflation is still 1.7 to 2.0%. To many it may seem that the Fed is disconnected from Main Street. Ask your neighbor how much their cost of living has risen in the last 6 months and they will tell you it’s much higher than a 2.0% annualized rate. Why the discrepancy?
The Fed Chairman can often be heard talking about “core inflation” and its use as a gauge of inflation overall. If the Fed sees low inflation in the core, which it has, then they can keep up the stimulus of low interest rates and QE2.
When one looks at what is indexed in the core, it becomes clear why the average person says inflation is high while Bernanke says it is low. The core does not include important items such as food and energy which have the largest impact on everyday life for Americans.
Real inflation as calculated using 1980 methodology is closer to 10%. Earlier this year many foods were rising in price upwards of 5% in a month. This is a bit staggering when you consider that the Fed is supposed to provide stable prices as part of their mandate. It is safe to say they have failed in this regard.
The other part of their mandate is to foster maximum employment. In his press conference, Bernanke cited the official unemployment rate of 8.8% as reason to continue a loose credit policy and QE2. He said that unemployment will continue to decrease as the economic recovery continues.
Taking into consideration the disingenuous inflation statistics and rhetoric, can we trust Bernanke and the government to give us accurate unemployment statistics? Unsurprisingly, no we cannot.
Real unemployment is around 22%. The official statistic (U3) of 8.8% excludes discouraged workers and treats those who can only find part-time work as employed. U3 was redefined in 1994 so as to show lower rates.
Can we at least take Bernanke at his word that the economy is recovering at a moderate pace? According to the Fed’s outlook, the economy will sustain moderate growth this year and accelerated growth in 2012 and 2013.
This hopeful projection is coming from a man who was saying the economy was sound even in late 2007 as the recession began and the housing bubble started to burst. His track record is one of complete inaccuracy and number cooking; there is no reason to think that has changed.
Instead of letting the market work out all the bad debt and deflating the bubble in 2008, the government and the Fed combined forces to bail out the “Too Big To Fails” on Wall Street. The fundamental imbalances of the system have not been addressed. In addition, the politicians in Washington refuse to reign in out-of-control spending.
What happens as Social Security and Medicare require money that simply isn’t there? Are we going to continue to have a military budget that accounts for 43% of world military spending? Are we going to continue to borrow $1.6 trillion a year even as China, Japan, and others begin to reduce their purchases of treasuries and actually reduce their holdings of dollars? Will the Fed continue buying treasuries thus enabling this runaway spending and devaluation of our currency?
These are serious questions that need to be dealt with. It is far more preferable to deal with them now and in an orderly way rather than being forced to by the market and our creditors. Sadly it appears the President, Congress, and Bernanke are not up to the task.