The Federal Reserve made history this week by holding its first-ever post-meeting news conference. Not surprisingly, it was an anticlimactic event. Chairman Bernanke was well prepared, which can’t be said of the journalists who were present. For the first time in 98 years, the press was given the opportunity to question a sitting Federal Reserve chairman about monetary policy. Instead of asking hard-hitting questions, the press lobbed softballs at Bernanke. It was a disappointment.
There wasn’t much news that actually came out of the conference. We did learn that the Fed’s “extended period” language means a couple of meetings. We learned that unlike most economists, Mr. Bernanke believes QE2 was successful. Apparently, Ben B. is taking all of the credit for the modest improvement we’ve seen in the economy over recent quarters. Somebody might want to point out to him that there were elections in November and a fiscal stimulus (which included Bush tax rate extensions) passed in December that might have had something to do with the improvement in the economic data. We also learned that Chairman Bernanke has his own interpretation of the truth. He told us that the Federal Reserve believes a strong and stable dollar is in America’s interest and the interests of the global economy. Not too credible since Ben B.’s easy-money policies have driven the dollar index down more than 12% in only eight months. Ben B. and his allies won’t say it, but they believe a weaker dollar helps the recovery. It’s shameful.
On future Fed policy actions, Bernanke indicated that QE2 will end in June, that the bar is higher for QE3—at least for now—and that the Fed will keep interest rates pegged at zero for at least a couple more meetings. The market reacted as would be anticipated. Stocks advanced and bond yields moved up, but the real action was in the commodity and currency markets. Following the Fed’s announcement, the dollar crashed and precious metals spiked. Silver rose 6.5%, gold jumped 1.5%, and the dollar index sold off. Against the higher-yielding Australian dollar, the U.S. dollar is down 22% since August 31. What a disgrace.
The news conference would have been much more interesting if the press had asked the right questions. Here are a few questions I would like to see Mr. Bernanke respond to.
1. Chairman Bernanke, you’ve stated in the past that the Federal Reserve’s second round of quantitative easing has inflated stock prices, but when you are asked if QE2 has inflated commodity prices, you and your top lieutenants say supply and demand are responsible. How can you claim credit for inflating stock prices but deny responsibility for inflating commodity prices? And how do you explain the uncanny correlation between the announcement that QE2 was on the way and the acceleration in commodity prices?
2. As you know, Chairman Bernanke, gold and silver are among the oldest forms of money. Since you first hinted that the Federal Reserve would engage in another round of quantitative easing, silver prices have gained over 145% and gold prices 22%. Does the recent performance of gold and silver signal a loss of confidence in both the dollar and the Fed’s ability to contain inflation?
3. Mr. Chairman, the Fed’s zero-interest-rate policy is effectively forcing seniors to move their retirement savings into risky assets in order to maintain their standard of living. Retired investors are the group of investors that are least able to accept investment risk. Can you explain why the Federal Reserve believes this is appropriate policy?
4. Almost all economists would agree that when the government fixes prices, adverse outcomes result. Can you explain why, then, you and your colleagues at the Federal Reserve believe that it is appropriate to fix the rate of interest—the most important price in the economy?
5. Almost every central bank in the world is now worried about rising inflation pressures, and many have started to tighten monetary policy. Is it the Fed’s contention that inflation is rising everywhere but the United States?
6. Are you familiar with the power of compound interest? I ask, Mr. Chairman, because the Fed’s mandate is to maintain stable prices, yet the FOMC’s definition of stable prices is inflation of around 2%. Mr. Chairman, are you aware that over a 20-year period, a 2% inflation rate results in a 50% increase in prices? Do you consider a 50% increase in prices stable?
Jeremy Jones, CFA
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