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Posted on April 27, 2011
By MICHAEL S. DERBY
When Federal Reserve Chairman Ben Bernanke makes his debut press conference Wednesday, his every word will be parsed for signs of where he hopes to take U.S. monetary policy.
Specifically, many people want to know when the central bank will begin raising interest rates, and when it will begin off-loading some assets, including Treasurys and its multitrillion-dollar cache of mortgages.
As Mr. Bernanke touches on topics familiar to Fed-watchers, he will use seemingly ordinary words or phrases that are freighted with important economic messages in the world of the Fed. A few examples:
“Inflation expectations.” If Mr. Bernanke frets about longer-run inflation expectations rising in the face of surging commodity prices, it could signal a hawkish turn for monetary policy and increase the odds that the Fed will boost interest rates earlier than is now expected.
A tip about TIPS. Watch for any comments about inflation-indexed Treasurys (known as TIPS). Any mention of these bonds in conjunction with a reference to consumer-sentiment surveys may offer significant clues to Mr. Bernanke’s thinking about inflation expectations. He could refer to them in a reassuring manneras in, demand for TIPS means that inflation expectations are staying low. It’s old news if he says something about short-term expectations having risen. He recently has acknowledged and dismissed this, saying it reflects the clear-cut rise in food and energy prices he believes won’t endure.
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“Extended period.” This bit of boilerplatewhich has appeared in Fed statements since the depths of the financial crisisis code for: Don’t expect us to raise interest rates anytime soon. In essence, “extended period” has codified the zero-percent, short-term rate regime of the post-crisis era. Mr. Bernanke may be asked what “extended period” really means. Or he may be asked to state when the Fed will drop “extended period” language for some new formulation. Mr. Bernanke is likely to dodge the questions.
Commodity prices. These raw input and basic material prices are surging and are at the root of the current inflation anxiety. Mr. Bernanke has indicated that rising commodity prices are transitory and won’t feed into underlying, or “core,” inflation, a measure that excludes volatile food and energy prices. If, however, Mr. Bernanke says he sees surging commodity prices as a more enduring problem, it increases the odds of tighter monetary policy (interest-rate increases, among other things).
Meanwhile, the Fed’s continuing $600 billion Treasury bond-buying program, known as QE2, is likely to generate its own set of issues:
Balance sheet. Look for Mr. Bernanke to affirm that QE2 will end in the summer, as planned. Any deviation from that position would be major news. Listen for what Mr. Bernanke says about the future size of the balance sheet. In this new world of Fed policy, how many securities the central bank holds is the primary signal of how much support it is providing the economy; the Fed has injected more than $2 trillion into the economy since the financial crisis.
It is considered unlikely, but if Mr. Bernanke hints the Fed may stop reinvesting the proceeds from its mortgage holdings, it will be seen as the first step toward actual monetary tightening. If Mr. Bernanke drops such a hint, expect the dollar to rally.
For the Federal Reserve, holding its first ever public press conference after a policy meeting requires working out a lot of small details on issues like who gets in and how Fed chairman Ben Bernanke should kick things off. Jon Hilsenrath explains.
The dollar. A question about the dollar could give Mr. Bernanke an opportunity to hit back at critics who argue current Fed policy has debased the dollar and driven money overseas in search of high-yielding instruments of the sort found in such emerging economies as Brazil, as well as commodities such as oil and gold. Mr. Bernanke has argued that other central banks need to get their own policies straight and stop blaming the Fed for their own economic problems.
Tuesday’s strong-dollar utterance by U.S. Treasury Secretary Timothy Geithner has given the Fed chairman some cover: If he’s quizzed about the dollar’s recent weakness, he can remind his audience that dollar policy is the purview of the Treasury and perhaps cite Mr. Geithner’s remarks.
Jobs, jobs. jobs. The elephant in the room is the lousy state of the job market. Almost any credible forecast says it will take years for the unemployment rate to fall to acceptable levels. Mr. Bernanke and his Fed peers have acknowledged this, and yet they are almost certain to have to tighten policy to stave off inflationeven if it doesn’t help reduce joblessness. It’s the rock and hard place that are hemming in Mr. Bernanke and his colleagues. Expect the chairman to acknowledge improvement in hiring but not to wax too enthusiastically about the trend.
Write to Michael S. Derby at email@example.com