Crescenzi: Grading Bernanke

I give Bernanke a B+ because for one he was too rehearsed at times, obviously reaching for and seeking to insert soundbites throughout the press conference and in his very lengthy opening monologue, which took up about 20% of the planned 45 minutes for the press conference.

In addition, Bernanke didn't do enough to stymie the increased momentum of the acceleration in inflation and inflation expectations that has occurred of late. Bernanke often appeared uncomfortable, but he will likely fair better in the future, because Bernanke appears to be a man who genuinely cares about improving the lives of Americans, and he will want to convey this image. If the press conference lacked intrigue, it is because there wasn't much that was interesting to say, so it was sort of like watching a great actor with a bad script.

Bernanke has three goals for his press conferences:

  1. Anchor inflation expectations
  2. Indicate policy will stay on hold for an extended period and thus keep asset prices will bid and hence promote economic activity
  3. (In the future) Limit the collateral damage from a reversal of policy given that the exit will be more complicated than simply changing the interest rate next time

The first goal was trumped by the second, which means that Bernanke essentially greenlighted a further increase in asset prices and commodities, the very trends that have boosted inflation expectations of late. This greenlighting has the potential to speed up the timetable for a future reversal in monetary policy, because of how it will feed asset prices and boost inflation expectations.

An increase in the inflation rate is of course one of the Fed's objectives, because deflation and debt are a lethal mix that the Fed wants to be sure the U.S. avoids. Irving Fisher (1933) described how debt and deflation "act and react on each other," in the same way that "a pair of diseases are sometimes worse than either or than the sum of both."

Nevertheless, the greenlighting of gains in asset and commodities prices by the Fed's big three — Bernanke, Dudley, and Yellen — put a lot of weight on them and it is getting increasingly difficult to imagine the these three holding up the wall, because millions of investors, the general public, and several within the Federal Reserve itself are pushing up against it. The wall gets heavier with each greenlight, and the Fed's big three will have increasing difficulty holding it back, especially with The Man on the Street having grown quite disturbed by the acceleration in inflation.

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Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."