Posted by Stephen Gandel Friday, October 15, 2010 at 10:18 am 6 Comments • Related Topics: federal reserve
Bernanke is tilting toward boosting inflation (Jason Reed/REUTERS)
Ever since the 1970s, one of the key jobs of the US Federal Reserve has been to fight inflation. Now, it seems the Fed is embarking on a path to resurrect its old foe.
On Friday morning, at a conference on Fed policy in Boston, Fed chairman Ben Bernanke made the case that the US central bank needs to do more to boost the economy. For Fed watchers this was expected. Unemployment remains high and the US recovery seems to be slowing. Bernanke's plan is to use central bank funds to buy up long-term Treasuries and other bonds in an effort to drive interest rates down, and lower borrowing costs for consumers and companies. And Bernanke is indicating, as expected, that the Fed will most likely act on that plan when it meets again in early November.
The real surprise in Friday's speech was how much the Fed chairman talked about inflation, and why it may be too low. No one likes rising prices. But he Fed's move to boost inflation may make a lot of sense right now. Here's why:
Bernanke acknowledged his focus on boosting inflation would be a major shift for the Fed. From CNNMONEY:
The Fed chairman, in a speech in Boston Friday morning, said persistently high unemployment poses too great a threat to the economy, and that the central bank needs to weigh the risk of weak prices, rather than focus on its traditional concerns about inflation. He suggested the battle against inflation has largely been won by the Fed.
[color=red]"For the first time in many decades, [the Fed] had to take seriously the possibility that inflation can be too low as well as too high," he said.[/color]Afterall, the Fed famously crushed the high inflation that brought the US economy to a halt in the 1970s. Bernanke said that the recent inflation rate of 1.1% is too low, and could get worse. Bernanke has been talking about deflation more, but now he seems to be taking the threat of falling prices seriously. The problem with low inflation or deflation is that it is not just a sign of a weak economy. It can actually make a weak economy even weaker.
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