Federal Reserve Appears Lost

Vedran Vuk | Casey Research | June 23, 2011

There are a lot of news stories surrounding Bernanke’s press conference yesterday. In my opinion, he didn’t say much that we don’t already know. Rather than attempt to discern his economic outlook from vague statements, I want to touch on a few major slip-ups in his talk. As I’ve noted in the past, even the most careful person can’t make it through an hourlong press conference without some mistakes.

The first quote has been reported in several major news outlets. At about 10:20 in the conference, Bernanke stated, “We don’t have a precise read on why this slower pace of growth is persisting.” I see two problems here. First, this statement should scare everyone from a Ph.D. economist to an average guy on the street without a clue about the Federal Reserve: Bernanke has just admitted his cluelessness.

Second, if Bernanke can’t explain the growth slowdown, then what does that mean for his unemployment and inflation projections accompanying the press conference? The charts point to falling inflation and unemployment. Isn’t it a bit hard to forecast unemployment when one doesn’t even understand growth in the present?

Further in the press conference, one journalist asks about the trajectory of future rates – whether they will rise suddenly or gradually. Bernanke say that he can’t say for sure as the situation is constantly changing. Well, if Bernanke doesn’t know, how can he possibly forecast lower inflation? To get lower inflation, he must necessarily raise rates – hence, that’s a bit of a contradiction.

The next quote is my favorite, and comes at about 25:15 in: “It’s only been two years since we’ve had the worst financial crisis certainly since the Great Depression, possibly the history of the United States.” That’s a serious mess-up. How are the bailouts and the near-zero interest rates defended every time? It’s usually something like, “If extraordinary actions weren’t taken, we’d be in another Great Depression.” According to Bernanke, the recent financial crisis was possibly the worst in “the history of the United States.”

Let’s clarify that – not the second-worst financial crisis, but possibly the worst. Yes, number one.

At another relevant part of the press conference (16:45), Bernanke responds to a journalist inquiring about the effects of immediate deficit cuts. According to the journalist, some view this as a route toward job creation. Bernanke responds with, “In the very short run, fiscal tightening is at best neutral and probably somewhat negative for job creation.”

This is an honest academic opinion. It is not the position of left-wing political ideologues who act as if the sky would fall down with reduced spending. According to Bernanke, there could be a little job loss or perhaps nothing at all.

The last notable remark was at the 45:00 mark. Bernanke points out that there was a one-third chance of deflation prior to the decision for QE2. Really, that’s it? Was the further destruction of the dollar and the extraordinary rise in commodity prices worth avoiding a one-third chance of deflation? I hardly think so.

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