January 21, 2008
Sawing on the anchor rope

Reuters reports:

Federal Reserve Chairman Ben Bernanke said on Thursday inflation expectations are "reasonably well anchored," but the U.S. central bank was determined to uphold its credibility in maintaining price stability. "Our anticipation is that both headline and core inflation will moderate over the next year or two to a level which we view as consistent with price stability," Bernanke told the U.S. House of Representatives Budget Committee.

Translation: Even though the Fed’s preferred measure of inflation, the Personal Consumption Expenditure deflator, is currently running at 2.2% year-over-year, above the Fed’s “comfort zone” (in which 2% inflation = price stability), TRUST US, the inflation rate will come down in 2008 even though we will be accelerating money growth with a big Fed Funds target rate cut at our next meeting, the opposite of pursuing an anti-inflation policy. After all, the market doesn’t yet show signs of rising inflation-rate expectations in survey data or longer-term interest rates. Sharply rising prices of gold and other metals? Sharply falling US dollar exchange value? Mere froth.

But what are inflation expectations “anchored” to? If anything, to a belief that the Fed will tighten when inflation rises above the “comfort zone”. Let’s see how long the Fed can contradict that belief before expectations change. Let's see how long inflation expectations remain anchored while the Fed saws on the anchor rope.

Posted by Lawrence H. White at 07:32 PM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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