Ben and the Fed's excellent adventure
The Federal Reserve chairman's first regular press conference in the US central bank's 98-year history was supposed to make more news when it was announced than when it actually took place. And so it proved. There was nothing much to rile the markets in Ben Bernanke's comments - on the dollar, interest rates or the US deficit.
The news, such as it was, had come earlier, in official confirmation that the second round of quantitative easing would be completed, on schedule, by June. Oh yes, and central bank has revised down its US growth forecast for 2011, from a midpoint of around 3.65% to 3.2%. (We should be so unlucky.)
Here were the few nuggets from the press conference that caught my ear.
First was the gloomy tone on inflation, in what seemed to be almost a throwaway comment from the Fed chairman. Officially, the Fed does not think that inflation poses a long-term risk to the economy, and it does not see any immediate reason to tighten policy to confront it. That was what the markets took from the official statement. But Bernanke had this to say, later on, when asked whether the Fed could, or should, be doing more to raise employment:
"... the trade-offs are getting less attractive at this point. Inflation is higher... inflation expectations are higher, and it's not clear we can get additional improvements in payrolls without extra inflation risk... in my view if we're going to have a sustainable recovery with healthy job growth, we need to keep inflation under control."
The UK's Monetary Policy Committee would surely agree. Though the Bank, unlike the Fed, doesn't have a dual mandate to achieve high employment as well as low inflation.
Mervyn King, Charlie Bean and the rest would also be pleased to hear Bernanke echo their "stock" view of quantitative easing, where the stimulative effect comes not from the speed of bond purchases, but the scale. The Fed chairman took the opportunity to spell this out, once again to journalists.
In line with market speculation, Bernanke suggested that the first and most likely step towards the exit would be to stop reinvesting in the market as the bonds mature, but he underlined that this step wouldn't be a mere formality, but a conscious step toward tightening, which would need to be based on the economic outlook in the same way that a rise in interest rates would.
Finally - and most interesting, perhaps, to a UK audience - the Fed chairman was asked about the risk that US spending cuts to tackle the deficit would hurt the recovery (the questioner did mention the UK as an example). Bernanke started by affirming that cutting the deficit was the "single greatest priority" facing the US, which he hoped the recent warning from the ratings agency Standard and Poor's would help underscore. But then he said this:
"My preference would be for taking a long-term perspective. If [Congress] can make credible commitments to cutting programmes over a long period of time, that seems to be the most constructive way to address what is a long-term problem. If [the cuts] are focused entirely on the short run, they might have consequences for growth" (which the Federal Reserve would take into account in setting its policy going forward).
I suspect even Ed Balls would hesitate to turn this into a full-fronted assault on coalition policy. The last time he tried to do that, after a similar comment by the US treasury secretary at Davos, Timothy Geithner miraculously (as it happens, directly after meeting Mr Osborne) decided to offer up a full endorsement of the coalition's strategy in an interview for the BBC. But it's an interesting comment for a fairly hawkish Fed chairman to make.
I don't think Mervyn King will be taking lessons in giving press conference from Mr Bernanke any time soon. But it was a decent performance - and an important step toward Fed transparency. Not so long ago, the Fed didn't even think it necessary to inform the public when its monetary policy had changed. The rest of us can think about what it would be like to live in an economy expecting "subpar" growth this year of 3.3%.