Economist's View

Access to Health Care

Ben Bernanke on Challenges for Health-Care Reform:

Access to health care is the first major challenge that health-care reform must address. In 2006, a total of 47 million Americans, or almost 16 percent of the population, lacked health insurance. ...[T]he evidence ... indicates that uninsured persons receive less health care than those who are insured and that their health suffers as a consequence. Per capita expenditures on health care for uninsured individuals are, on average, roughly half those for fully insured individuals. People who are uninsured are less likely to receive preventive and screening services, less likely to receive appropriate care to manage chronic illnesses, and more likely to die prematurely from cancer--largely because they tend to be diagnosed when the disease is more advanced. One recent study found that uninsured victims of automobile accidents receive 20 percent less treatment in hospitals and are 37 percent more likely to die of their injuries than those who are insured.

Update: More on health care from Dean Baker:

Insurance fraud, by Dean Baker: The health insurance system in the United States works great, as long as you stay healthy. It's only people who need medical care who have problems.

"Does Stabilizing Inflation Contribute to Stabilizing Economic Activity?"

I have been a proponent of inflation targeting procedures. However, many people take that to mean that inflation stability should take precedence over the stabilization of output and employment, or that we should suppress wages to prevent inflation. Here's a simulated interview with Frederic Mishkin generated from a recent speech that tries to clear this up (see also "Divine Coincidence is Unlikely" and "Mankiw on "Divine Coincidence" in Monetary Policy"). There are also comments about the use of core rather than headline inflation to guide monetary policy:

MT: Thanks for agreeing to do this in the simulation. Let's start by defining what the Fed is supposed to do. What are the Fed's goals?

FM: The ultimate purpose of a central bank should be to promote the public good through policies that foster economic prosperity.

MT: And how is that expressed practically?

FM: Research in monetary economics describes this purpose by specifying monetary policy objectives in terms of stabilizing both inflation and economic activity. Indeed, this specification of monetary policy objectives is exactly what is suggested by the dual mandate that the Congress has given to the Federal Reserve to promote both price stability and maximum employment.

MT: Let's get right to the big question. Does stabilizing inflation mean that the Fed is less focused on stable output and employment?

FM: We might worry that, under some circumstances, the objectives of stabilizing inflation and economic activity could conflict, particularly in the short run. However, economic research over the past three decades suggests that such conflicts may not, in fact, be that serious. Indeed, stabilizing inflation and stabilizing economic activity are mutually reinforcing not only in the long run, but in the short run as well.

MT: You mentioned both the short-run and the long-run. Let's start with the long-run becasue there is less controversy there. What do theory and evidence tell us about the long-run tradeoff between inflation and unemployment?

Milton, the Money Stock, and an Apolitical Fed

William Poole's birthday present to Milton Friedman is to give a speech saying his advice on monetary policy was less than optimal. Here's a summary of that part of Poole's speech from David Wessel followed by Poole's comments related to political influence on Fed policy:

Milton Friedman Wasn’t Right About Everything, by David Wessel, Real-Time Economics: William Poole, a self-described “card-carrying monetarist” who is now president of the St. Louis Federal Reserve Bank, says the Fed’s track record over the past 25 years is better than it would have been had it followed Milton Friedman’s prescription of maintaining steady growth in the money supply.

“I believe that the Fed’s actual adjustments of its federal funds rate target have yielded superior outcomes since 1982 to what we would have observed under steady money growth,” he said in the prepared text of a speech ... to mark the 95th anniversary of the late Milton Friedman’s birth. “I also believe that advances in knowledge permit us to say with some confidence that these gains are not just an accident of Alan Greenspan’s special skills and intuition,” Mr. Poole said.

So what’s the secret? Persuading the public, businesses and the markets that the Fed won’t let inflation get out of control or, in the jargon of economists, “anchoring inflationary expectations.”

“Everything Milton argued about money stock control is true,” he added, “but the effect of inflation expectations on the practice of monetary policy itself was, I believe, a missing element in the analysis. The economy functions differently when inflation expectations are firmly anchored. If a central bank allows expectations to become unanchored, then interest-rate control becomes a dangerous and potentially destabilizing policy. But should the practice of monetary policy depend on how well inflation expectations are anchored? I do not recall Milton discussing this question, perhaps because he believed that the best way to maintain well-anchored expectations over time was for the central bank to commit to steady and low money growth under all circumstances.”

Bernanke: Inflation Expectations and Inflation Forecasting

This won't be for everyone, but I know many of you have an interest in issues involving inflation, money growth, and Federal Reserve policy so I thought I'd post (slightly shortened) remarks made by Ben Bernanke on the relationship between monetary policy, inflation, inflation expectations, and on how the Fed forecasts inflation.

It's a good, general summary (along with references) of where the literature stands on these topics. In looking for new parts in the speech, two things caught my attention. First, Bernanke's commitment to gradualism as a policy guideline. Under gradualism, the federal funds rate is adjusted slowly to a new target rather than jumping to a new target immediately. That is, if the Fed wants to raise interest rates by one percent, it can do so gradually, e.g. in four .25 percent moves, or it can jump the full amount in one move. Gradualism argues for the smaller, incremental moves of the type we have seen recently.

Bernanke has emphasized gradualism before (e.g. see this speech from 2004, "Gradualism"), but given a second emphasis in his speech, the use of models where learning by both the monetary authorities and the public plays a role, gradualism is worth emphasizing again because the imposition of learning generally enhances the gradualist case. His 2004 speech gives indications of what he means by a gradualism, he will advocate moving slowly to a new target except in very unusual circumstances, and the new learning results he's emphasizing will reinforce this approach to policy:

Inflation Expectations and Inflation Forecasting, by Chairman Ben S. Bernanke, Chairman, FRB: ...As you know, the control of inflation is central to good monetary policy. ... Inflation injects noise into the price system, makes long-term financial planning more complex, and interacts in perverse ways with imperfectly indexed tax and accounting rules. In the short-to-medium term, the maintenance of price stability helps avoid the pattern of stop-go monetary policies that were the source of much instability in output and employment in the past. More fundamentally, experience suggests that high and persistent inflation undermines public confidence in the economy and in the management of economic policy generally, with potentially adverse effects on risk-taking, investment, and other productive activities that are sensitive to the public's assessments of the prospects for future economic stability. In the long term, low inflation promotes growth, efficiency, and stability--which, all else being equal, support maximum sustainable employment...

Admittedly, measuring the long-term relationship between growth or productivity and inflation is difficult. For example, it may be that low inflation has accompanied good economic performance in part because countries that maintain low inflation tend to pursue other sound economic policies as well. Still, I think we can agree that, at a minimum, the opposite proposition--that inflationary policies promote employment growth in the long run--has been entirely discredited and, indeed, that policies based on this proposition have led to very bad outcomes whenever they have been applied.

Ben Bernanke: Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy

Ben Bernanke on the benefits and challenges of free trade. The speech covers:

• The Benefits of Trade
• Trade and Jobs
• What About Outsourcing Abroad?
• Responding to Job Displacement

Here's the speech itself. I expect this will convert all you doubters into enthusiastic supporters of the free trade agenda:

Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy, by Ben S. Bernanke, Chair, Federal Reserve Board: Trade is as old as humanity, or nearly so. Archaeological sites demonstrate that ancient peoples traded objects such as rare stones and shells across fairly long distances even in prehistoric times (Guisepi, 2000). Over the centuries, with stops and starts, the volume of trade has expanded exponentially, driven in large part by advances in transportation and communication technologies. Steamships replaced sailing ships; railroads succeeded canal barges; the telegraph supplanted the Pony Express. Today, in a world of container ships, jumbo jets, and the Internet, goods and many services are delivered faster and more cheaply (in inflation-adjusted terms) than ever before.¹

Janet Yellen: The U.S. Economy: Prospects and a Puzzle Revisited

Janet Yellen examines an important question, "Why is the labor market apparently going gangbusters, while growth in real GDP has turned in only a middling performance?":

The U.S. Economy: Prospects and a Puzzle Revisited, By Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco: ...Tonight I plan to discuss the prospects for the U.S. economy. I’d like to return to a theme that I discussed in a speech a few months ago and that has been on my mind ever since. It concerns a puzzling economic development. The puzzle, as I put it then, was: Why is the labor market apparently going gangbusters, while growth in real GDP has turned in only a middling performance? The reason I’d like to revisit the puzzle is that, in the intervening period, its mystery has deepened: economic growth has unexpectedly slowed from “middling” to a crawl, while the unemployment rate has actually inched down and employment growth has remained robust.

These and other recent developments have not dramatically changed my mainline forecast for the U.S. economy over the next year or so, but they have significantly increased the risks to the outlook, both for growth and inflation. While I’ve revised down my forecast for economic activity for the first half of 2007, I still expect to see a moderate pace in the second half of the year. At the same time, much of the news pertaining to the first quarter has been disappointing, and has raised the downside risk for growth. I continue to think that inflation is likely to edge down over the year, but, with labor markets appearing to have tightened further, rather than easing as I expected, the upside risks to this outlook have gotten bigger.

William Poole: Changing World Demographics and Trade Imbalances

William Poole has a perspective that differs from most on global imbalances and the low personal saving rate in the U.S. After briefly reviewing seven explanations for global imbalances and differences in cross-country saving rates, he concludes there's little to worry about since most of it can be explained by the life-cycle hypothesis combined with demographic differences between countries. In fact, he will argue that "to a large extent, the current situation is not fundamentally an imbalance but rather a condition that is conducive to coping with the major demographic changes that are occurring throughout the world." I agree demographics is part of the explanation, but I'm not convinced it is as important as he has concluded, particularly if it means we become complacent about the potential for a sudden rebalancing of global accounts:

Changing World Demographics and Trade Imbalances, by William Poole, President, Federal Reserve Bank of St. Louis: ...The world economy is characterized by three highly unusual conditions. First, the capital flow into the United States from the rest of the world and accompanying rest-of-world current account surplus—the U.S. current account deficit—is very large and persistent. Second, the U.S. personal saving rate has been falling and past year became negative for the first time since 1933. Third, high-income countries are just now beginning a demographic transition in which the fraction of retired persons in the total population will rise to levels never before experienced. The idea I will explore with you is that these three conditions are connected; the first two, I believe, are to a considerable extent a consequence of the third.

Today’s topic on the connection between demographic changes and trade balances certainly is important. My analysis combines demographic and economics facts with economic theory to provide some insights into the connections between demographic changes and international trade. ... I especially want to highlight my unease with using the term “imbalances” to characterize the current situation. That term almost begs for a policy response—how can policymakers allow imbalances to persist? Unfortunately, policy responses could well involve damaging protectionist measures. I will argue that, to a large extent, the current situation is not fundamentally an imbalance but rather a condition that is conducive to coping with the major demographic changes that are occurring throughout the world...

Current Account Balances: Facts and Explanations Large and persistent current account surpluses and deficits are common in the global economy today, as illustrated in Figure 1 [note: in text links are to originals]. Since early 1998, the U.S. current account has trended downward, a fact that has attracted much attention not only in the United States but also throughout the world. As a share of U.S. GDP, the U.S. current account deficit has increased from roughly 2 percent to a level exceeding 6.5 percent in 2006. ... It is clear that today’s U.S. current account deficit substantially exceeds any other such deficits during the second half of the last century.

The United States, however, is not the only country with a current account deficit that is a relatively large share of its gross domestic product. In fact, certain European nations fit such a description. Figure 2 ... shows this ratio for the European Union and for selected European countries, some of which have current account deficits relative to GDP larger than the United States. For example, both Spain and Portugal have current account deficits that are close to 10 percent of GDP.

"Bad Fiscal Policy Creates Pressure for Bad Monetary Policy"

Here's part of a speech on fiscal policy by Richard Fisher, president of the Federal Reserve Bank of Dallas:

Fiscal Issues: From Here to Eternity, President, by Richard W. Fisher, FRB Dallas: ...I am going to speak today ... about fiscal policy, an area into which central bankers rarely wander. ... Before doing so, let me remind you that the Federal Reserve is a strictly nonpartisan institution; when you enter the temple of the Federal Reserve, you check your partisan affiliation at the door...

According to official government trustee reports, the infinite-horizon discounted present value of our unfunded liability from Social Security and Medicare—in common language, the gap between what we will take in and what we have promised to pay—now stands at $83.9 trillion. The potent combination of lower birthrates, higher medical costs and longer life expectancies provides little reason to hope that the figure will fall.

Charles Plosser: Credibility and Commitment

Which produces a better outcome for the economy, a central bank with the discretion to respond as needed to any situation that might arise, or a central bank credibly committed to a rule that it will follow even when unusual events occur? Philadelphia Fed President Charles Plosser has a very nice non-technical discussion of this issue [see also "Explicit Inflation Targeting as a Commitment Device," something similar I wrote about a month ago, which includes responses from Jamie Galbraith and Dean Baker to the idea of committing to inflation targets, disagreements with the story I told and the story told below about why inflation fell in the 1980s, and related issues]:

Credibility and Commitment, by Charles I. Plosser, President Federal Reserve Bank of Philadelphia: ...I’d like to begin by asking a question. How many of you have ever decided that you would be healthier and happier if you lost a few pounds and so made a New Year’s resolution to go on a diet? I know I have. But, if you are like me, tomorrow comes and it’s your wife’s or husband’s birthday... Then over the weekend there is a party in the neighborhood and the food is outstanding, so you decide that the diet can wait until next week. But as the days and weeks go by, next week just never comes, and you, in effect, abandon your dieting plan altogether. We all know we would have been better off if we had just stuck to our diet. Yet somehow we failed to follow through consistently on what was basically a good plan.

At this point some of you may be thinking, "What does this have to do with monetary policy?" But the fact is that policymakers often have a good plan, as well, but may not be able to resist eating that soufflé. Consequently, not only would the good plan go out the window, but the public would lose confidence in the policymaker’s credibility to follow through on its promises. ...

Today, I am going to address one critical element of the Fed’s ability to achieve its objectives—the importance of making credible commitments.

Bernanke's Testimony before the Joint Economic Committee of Congress

Federal Reserve Chairman Ben Bernanke testified today before the Joint Economic Committee of Congress. In his remarks, he clarified the Fed's position and indicated that there should be no expectation of a rate cut any time soon:

Bernanke plays down need for rate cuts, by Krishna Guha, Financial Times: The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday. The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

The Federal Reserve chairman also emphasised that the US central bank remains concerned about the threat that inflation will not moderate as expected, arguing that high levels of resource utilisation could still fuel price rises. He added the US central bank was not as confident in its outlook as it had been a couple of months ago, when it was increasingly upbeat about the prospects for a soft landing.

Mr Bernanke’s remarks ... offered no hint that the Fed yet believes that it will have to cut interest rates soon, as the market expects. But he recognised that “uncertainties around the outlook have increased” and said the Fed would respond in the light of incoming economic data.

His comments came as the Department of Commerce released figures showing durable goods orders bounced back only weakly in February after a sharp plunge in January. ... Mr Bernanke told the Joint Economic Committee of Congress “the possibility that the recent weakness in business spending will persist is an additional downside risk.”

The Federal Reserve chairman hinted the weakness in business spending had come as a surprise to the Fed ... However, Mr Bernanke added “despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year”...

Moreover, the Fed chairman signalled that he was less alarmed than many investors by the distress in the subprime mortgage market. “At this juncture…the impact on the broader economy and financial markets of the problems in the subprime market seem likely to be contained,” he said ... adding “we will continue to monitor this situation closely.”

He reiterated the Fed’s view that the drag from cut-backs in residential investment should “wane” as builders work off the inventory of unsold new homes – though he recognised that the housing market correction “could turn out to be more severe than we currently expect...”

Overall, Mr Bernanke indicated that the US central bank remains relatively upbeat on the prospects for US growth. ... Mr Bernanke reiterated a series of reasons why the Fed remains concerned about inflation. “The high level of resource utilisation remains an important upside risk to continued progress on reducing inflation,” he said. The Fed chairman refered to the “tightness in the labour market” and to difficulties firms face hiring qualified workers.

Allan Meltzer, in a comment about Larry Summers' recent column calling on the Fed to ease policy in response to any signs of weakness in the economy, explains why the Fed is reluctant to ease too quickly:

Allan Meltzer: We all have heard many times that those who forget their history are likely to repeat it. One of the main reasons that the Great Inflation continued from 1965 to 1979 was that the Federal Reserve (and the Bank of England) put great weight on unemployment and too little weight on inflation. In the 1970s the Federal Reserve waited for unemployment to get above 7 per cent before it abandoned any effort to lower inflation.

The US saw both inflation and the unemployment rate rise to postwar peaks. Paul Volcker ended this policy by letting unemployment rise as required to bring down inflation. The public supported him.

Larry Summers wants to repeat the earlier mistakes. Even before the unemployment has started to rise, he wants the Fed to anticipate the rise and react against it by lowering interest rates.

An economy that cannot accept some temporary increase in the unemployment rate will live with increasing inflation followed by low investment, declining real wages, and higher unemployment. Fortunately, most of the members of the Open Market Committee understand that. And the public as in 1979-80 will demand an end to the policy.

See also Kash Mansori, The Big Picture, Bloomberg, WSJ, NYT, and the Washington Post.

Here is the text of Bernanke's prepared remarks:

Testimony of Chairman Ben S. Bernanke, by Ben Bernanke, Federal Reserve Chair: Chairman Schumer, Vice Chairman Maloney, Representative Saxton, and other members of the Committee, thank you for inviting me here this morning to present an update on the outlook for the U.S. economy. I will begin with a discussion of real economic activity and then turn to inflation.

Frederic Mishkin: Inflation Dynamics

If you are interested in inflation dynamics and recent research suggesting that inflation dynamics have changed, this speech by Federal Reserve governor Frederic Mishkin looks at three important questions:

1. What is the available evidence on changes in inflation persistence in recent years?
2. What is the available evidence on changes in the slope of the Phillips curve?
3. What role do other variables play in the inflation process?

The speech summarizes and interprets research on these questions, and discusses the impact of the research on the conduct of monetary policy. As I've explained before, I am in agreement with his conclusions about the role of policy in anchoring expectations and how this has changed estimated inflation dynamics, and what this implies for monetary policy and inflation targeting. Too bad my monetary theory and policy class ended last week - I can't make them read this [Update: Brad DeLong provides a nice summary of the sections discussing the role of policy in anchoring expectations]:

Inflation Dynamics, by Frederic S. Mishkin, Federal Reserve Governor: Under its dual mandate, the Federal Reserve seeks to promote both price stability and maximum sustainable employment.[1] For this reason, we at the Federal Reserve are acutely interested in the inflation process, both to better understand the past and--given the inherent lags with which monetary policy affects the economy--to try to forecast the future. We economists have made some important strides in our understanding of inflation dynamics in recent years. To be sure, substantial gaps in our knowledge remain, and forecasting is still a famously imprecise task, but our increased understanding offers the hope that central banks will be able to continue and perhaps even improve upon their successful performance of recent years.

Today, I will outline what I see as the key stylized facts that research has in recent years uncovered about changes in the dynamics of inflation and will present my view of how to interpret these findings. The interpretation has important implications for how we should think about the conduct of monetary policy and what we think might happen to inflation over the next couple of years. I will address these two issues in the final part of the talk.

Geithner: Credit Markets Innovations and Their Implications

New York Fed president Tim Geithner, who hasn't been shy about warning about financial risks from financial market innovation, doesn't seem too concerned that problems in the subprime mortgage market will spread and cause wider disruptions. Here's part of a longer speech:

Credit Markets Innovations and Their Implications, by Timothy Geithner, NY Fed President: ...The latest wave of credit market innovations has elicited some concerns about their implications for the stability of the financial system, concerns similar to those associated with earlier periods of rapid change in financial markets. Will the most recent credit market innovations amplify credit cycles, contributing to "excessive" lending in times of relative stability, and then magnify the contraction in credit that follows? Will they introduce greater volatility in financial markets? Will they create greater risk of systemic financial crisis?

These concerns have been heightened in some quarters by the problems currently being experienced in the subprime mortgage sector. It will take some time before the full implications are understood and the full impact can be assessed. As of now, though, there are few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole.

Indeed, economic theory and recent practical experience offer some reassurance against both these specific concerns and more general worries about the implications of credit market innovations for the performance of the financial system. ...

There are ... compelling arguments in favor of a generally positive assessment of the consequences of innovation. Does experience provide support for these arguments, or are these changes too new for us to know? ...

We are now well into the third decade of experience with the consequences of these earlier innovations, and this history offers some useful lessons for evaluating the probable impact of the latest changes in credit markets.

The ease with which the U.S. financial system absorbed the substantial scale of corporate defaults that peaked in recent years in 2002 provides some support for the argument that broader and deeper capital markets make the system more resilient. In general, there does not seem to be strong empirical support for the proposition that derivatives increase volatility in financial markets. ...

Credit market innovation does not appear to have resulted in a large increase in leverage in the corporate sector, as some had feared. ...

Default rates do not appear to have risen, nor recovery rates fallen as these credit innovations have spread, despite concerns they might lead to excess lending, the mis-pricing of credit risk and more messy and more complicated workouts, resulting from the greater diffusion of the investor base.

And although the sources of the broad moderation in GDP volatility observed in the United States over the past two decades are still the subject of debate, the fact that this moderation occurred during a period of extensive innovation in credit and other financial markets should provide some comfort for those who expected the opposite.

Innovations in credit markets are inevitably accompanied by challenges. Indeed, the history of innovation in financial markets provides many examples of periods of rapid change accompanied by fraud and abuse, by challenges in assessing value and risk, by concerns about the adequacy of investor and consumer protection, and by unexpected behavior of prices, defaults and correlations. To some degree, these types of problems are the inevitable consequence of change and innovation.

Although recent experience as well as theory provide some reassurance..., these judgments require qualification. Some aspects of this latest wave of innovation are different in substance ... from their predecessors. ... [B]road changes in financial markets may have contributed to a system where the probability of a major crisis seems likely to be lower, but the losses associated with such a crisis may be greater or harder to mitigate.

What should policymakers to do mitigate these risks?

We cannot turn back the clock on innovation or reverse the increase in complexity around risk management. We do not have the capacity to monitor or control concentrations of leverage or risk outside the banking system. We cannot identify the likely sources of future stress to the system, and act preemptively to diffuse them.

The most productive focus of policy attention has to be on improving the shock absorbers in the core of the financial system, in terms of capital and liquidity relative to risk and the robustness of the infrastructure. ...

The Federal Reserve is actively involved in a range of efforts... The stronger these shock absorbers, the more resilient markets will be in the face of future shocks, and the more confident we can be that banks will be a source of strength and of liquidity to markets in periods of stress and that the financial system will contribute to improved economic performance over time.

Here's more from the Fed from the last few days:

• What Can We Expect from the Yield Curve?, by Charles I. Plosser, President Federal Reserve Bank of Philadelphia
• Vice Chairman Kohn on asset-pricing puzzles, credit risk, and credit derivatives
• Governor Kroszner on recent innovations in credit markets
• The Fed's View of the Sub-Prime Mortgage Market

Update: See also "Toothless Fed, Part 2 (Risk Management Shortcomings)" from Yves Smith at naked capitalism.

Janet Yellen: The Asian Financial Crisis Ten Years Later

Janet Yell, president of the San Francisco Fed, with an interesting discussion of the Asian financial crisis:

The Asian Financial Crisis Ten Years Later: Assessing the Past and Looking to the Future, by Janet Yellen, President, FRBSF: Good afternoon. ... This is the first in a series of presentations, seminars, and conferences the San Francisco Fed will be involved with over this year as we explore various facets of the Asian financial crisis, focusing on the stability and resiliency of financial sectors...

At the time of the crisis, I was the Chair of President Clinton’s Council of Economic Advisers, and, as you may imagine, it was definitely a “front-burner” issue for us. As the crisis spread from country to country, there was deep concern about how big the impact would be on the U.S. economy... For the five Asian nations most associated with the crisis—Thailand, Korea, Indonesia, the Philippines, and Malaysia—the toll in both human and economic terms was enormous: in 1998, these countries saw their economies shrink by an average of 7.7 percent and many millions of their people lost their jobs. More broadly, there was concern that the crisis had revealed new sources of risk in the international financial architecture. ...

In my remarks this afternoon, ... I will first review the major strands of thought in the literature on the causes of the crisis, highlighting some of the vulnerabilities that were contributing factors. Then I will turn to conditions in the affected countries today and examine how their policy responses to the crisis have shaped the current Asian financial environment. I will round out my remarks with some thoughts on lessons learned, particularly for international financial institutions, and observations on China in the current environment. ...

Ben Bernanke Warns on Inequality

Today, Ben Bernanke joins another Federal Reserve official, Janet Yellen, in warning about the dangers of widening inequality. Here's the summary by David Wessel of the Wall Street Journal:

Bernanke Cautions About Inequality, But Warns of Too Many Limitations, by David Wessel, WSJ: Federal Reserve Chairman Ben Bernanke cautioned that widening inequality may make Americans "less willing to accept the dynamism… so essential to economic progress," but warned politicians to avoid responding by limiting the flexibility of labor markets or erecting barriers to international trade in investment.

Wiser responses, he said, would be to improve education and training and cushion the dislocations caused by technology and globalization, such as making health and pension benefits more portable and offering retraining and job-search assistance to displaced workers. ...

"Although average economic well-being has increased considerably over time," he said "the degree of inequality in economic outcomes has increased as well… for at least three decades"...

With 48 academic references, [the speech] documented the inequality trend and detailed reasons behind it -- from the extra wages that employers are willing to pay workers with formal education to the decline of unions to the impact of globalization, which he said has been "moderate and almost surely less important than the effects of… technological change."

The Fed chairman said "firm conclusions about the extent to which policy should attempt to offset inequality… is… properly left to the political process." But he offered three principles that he said are "broadly accepted in our society" -- economic opportunity should be as widely distributed and equal as possible, economic outcomes needn't be equal but should be linked to a person's contributions and people should get some insurance against "the most adverse economic outcome."

"We… believe," he said, "that no one should be allowed to slip too far down the economic ladder, especially for reasons beyond his or her control." ... [Note - transcription errors in quotes fixed.]

I agree. Here's the entire speech:

The Level and Distribution of Economic Well-Being, Chairman Ben S. Bernanke, Federal Reserve Board of Governors: A bedrock American principle is the idea that all individuals should have the opportunity to succeed on the basis of their own effort, skill, and ingenuity. Equality of economic opportunity appeals to our sense of fairness, certainly, but it also strengthens our economy. If each person is free to develop and apply his or her talents to the greatest extent possible, then both the individual and the economy benefit.

Bernanke: Entitlement Spending Threatens Future Economy

Federal Reserve Chair Ben Bernanke testified before the Senate Budget Committee today. Greg Ip summarizes his testimony [Update: Video of testimony from CSPAN]:

Bernanke to Congress: Time for Action, by Greg Ip, Washington Wire: Bernanke Federal Reserve Chairman Ben Bernanke testified today that “long-term fiscal imbalances” due to rising spending on entitlement programs such as Medicare and Social Security imperil the economy. “If early and meaningful action is not taken,” he warned Congress, “the U.S. economy could be seriously weakened, with future generations bearing much of the cost.”

When Senate Budget Committee Chairman Kent Conrad (D., N.D.) asked, “How urgent is it that we address these long term imbalances?” Bernanke replied: “The right time to start is about 10 years ago.”

I think that Bernanke should speak out on the budget issue if he is concerned, and I was pleased that he adopted a neutral stance and resisted saying whether taxes or spending changes are to be preferred in dealing with the projected budget problem. I don't think the Fed should take a position one way or the other, though hearing the Fed's view on the consequences of each strategy for dealing with the deficit issue would be helpful.

But if this had been a draft of his testimony rather than a finished product, I would have made three suggestions:

1. The Fed's job is monetary policy, not fiscal policy. Make the connection between budget deficits and, through the government budget constraint, the choices the Fed would have to make as a consequence. For example, if the economy were to slump as forecast in one scenario given in the talk, would the Fed steadfastly refuse to monetize the debt? Will the Fed's hand be forced in any particular way, or will it face any difficult tradeoffs due to the budget problem? I think the Fed would have difficult choices to make if the deficit increased as projected and it would be helpful to hear the the Bernanke's view on how the Fed would react. [Update: see Jim Hamilton on this point.]

2. The Social Security and Medicare problems are not of the same order of magnitude. Draw a sharper distinction and make it clear that Medicare is far and away the biggest worry.

3. The speech reads as if there are only two choices with respect to the budget problem, changing taxes or changing spending. But there is another choice too and it is related to the fact that Medicare is the biggest worry. By reorganizing our health care delivery system - e.g. a universal care, single-payer system - it may be possible to realize substantial savings. While it could be argued that this comes under the heading of changes in expenditures, achieving budget reduction by reorganizing the health care system is fundamentally different from what we usually think of as spending cuts.

Here's the written part of Bernanke's testimony before the Senate:

Long-term fiscal challenges facing the United States, by Ben Bernanke, Federal Reserve Chairman: Chairman Conrad, Senator Gregg, and other members of the Committee, I am pleased to be here to offer my views on the federal budget and related issues. At the outset, I should underscore that I speak only for myself and not necessarily for my colleagues at the Federal Reserve.

Mishkin: Housing Prices and Monetary Policy

Federal Reserve governor Frederic Mishkin discusses how the Fed should respond to asset price bubbles:

The issue here is ... how central banks should respond to potential bubbles in asset prices in general: Because subsequent collapses of these asset prices might be highly damaging to the economy, ... should the monetary authority try to prick, or at least slow the growth of, developing bubbles?

I view the answer as no.

Here's the speech:

The Role of House Prices in Formulating Monetary Policy, by Frederic S. Mishkin, Federal Reserve Board: Over the past ten years, we have seen extraordinary run-ups in house prices. From 1996 to the present, nominal house prices in the United States have doubled, rising at a 7-1/4 percent annual rate.1 Over the past five years, the rise even accelerated to an annual average increase of 8-3/4 percent. This phenomenon has not been restricted to the United States but has occurred around the world. For example, Australia, Denmark, France, Ireland, New Zealand, Spain, Sweden, and the United Kingdom have had even higher rates of house price appreciation in recent years.

NY Fed's Geithner on Risks to the U.S. Economy

New York Fed president Tim Geithner expresses concern over risks from the budget deficit, fixed exchange rates, and growing inequality:

N.Y. Fed’s Geithner Issues Clearer Warnings, by Greg Ip, WSJ Washington Wire: New York Fed President Timothy Geithner delivered one of his strongest warnings yet on threats facing the U.S. economy, citing the budget deficit, fixed exchange rates and growing inequality. ...

He said some countries, to keep their currencies fixed to the dollar, are accumulating big reserves of dollar-denominated securities, thereby holding down long-term interest rates, which might be distorting U.S. growth and investment. He did not name the offenders, but China and some Persian Gulf oil exporters are probable candidates.

He also ventured into politically charged terrain that Fed Chairman Ben Bernanke has tried to avoid. ... Geithner warned that current year deficits are too high while Bernanke has generally limited his concerns to the threat of higher entitlement spending in later years. Geithner said, “Even … before the increase in number of retirees starts to have a major impact on Social Security and Medicare expenditures, we are running an unsustainably large fiscal deficit.” ...

Geithner explicitly endorsed the new Democratic majority’s move to restore “pay-go” rules that require new tax cuts or spending programs to be funded with offsetting revenues or spending cuts. But “they need to be complemented by a consensus on policy changes that will produce smaller future deficits.”

He also echoed San Francisco Fed President Janet Yellen on the threat of growing inequality. And paraphrasing his former boss, former Treasury Secretary Lawrence Summers, he said it’s “not enough” to say globalization is inevitable and protectionism will only hurt. Nor, he suggested, is it enough to call for more education and a better safety net: they “have a long fuse and they may not yield the hoped-for increase in support.” He did not, however, say what steps should be taken.

After the speech he said he took little comfort in the lack of broader fallout from the demise of the hedge fund Amaranth. “It was very interesting but very special” episode that may not have broader lessons on the impact of hedge funds, he said. ...

[Update: See also Wage gap ‘undermines’ free trade support (open) from the Financial Times.] Here's the entire speech:

Developments in the Global Economy and Implications for the United States, by Timothy F. Geithner, President NY Fed: It is a pleasure to be here at the Council on Foreign Relations, and to be here with Jerry Corrigan. A few brief remarks about the global economy, both the real and financial dimensions, to provide a basis for our discussion.

Bernanke: Inflation Risks Remain Elevated

Ben Bernanke says he remains concerned about the elevated risk of inflation. From Greg Ip at the the Wall Street Journal:

Bernanke Warns of Inflation Risks, Suggesting No Rate Cut Coming Soon, by Greg Ip, Wall Street Journal: Federal Reserve Chairman Ben Bernanke said he is still worried about inflation as tight labor markets fuel wage gains, and economic growth outside of housing remains solid.

Mr. Bernanke's hawkish remarks on inflation and upbeat view of the economy contrast with the emerging view on Wall Street that the economy is weakening and inflation risks have faded. Those views, in recent weeks, had led to rising expectations the Fed will cut rates in the next six months. ...

But Mr. Bernanke said the choice facing the Fed at present is whether to raise rates, not cut them. "Whether further policy action against inflation will be required depends on the incoming data," Mr. Bernanke said...

Mr. Bernanke said that both the economy and inflation had behaved much as expected when he testified on the economy in July. "Outside of the housing and motor-vehicle sectors, economic activity has, on balance, been expanding at a solid pace," he said. While trends in core inflation, which excludes food and energy, are less worrisome than in the spring, at 2.7% in October it "remains uncomfortably high," he said.

While much of the speech reiterated themes of other Fed commentary and his own testimony in July, Mr. Bernanke broke new ground by dwelling on the tight labor market and its potential to push up wages and prices. ... Furthermore, in another break from recent commentary, he said the fact the economy is operating with less spare capacity has "likely played some role in the rise in core inflation."

The primary reason for his new emphasis on these factors likely relates to the steady decline in the unemployment rate, hitting 4.4% in October. Back in July, Fed officials projected a year-end jobless rate of 4.75% to 5%. At the same time, hourly earnings growth and employment costs has accelerated. Job growth has also been solid, and with it, personal income growth -- the most important determinant of consumer spending. ... Mr. Bernanke said that outside housing, consumer spending has been growing at about the same rate through the current quarter that it has since late 2001.

He acknowledged the housing market remains a risk to the economic outlook. "The rate of home-price appreciation has slowed significantly," he noted, and the overhang of unsold homes is likely even larger than the sizable official figures. But he added that home sales seem to be "stabilizing," though construction could continue to decline for a while to bring the supply of unsold homes back in line with demand.

He acknowledged "the correction in the housing market could turn out to be more severe and widespread" than expected. But he also said the economy could rebound from the housing-induced slowdown more briskly than expected. On inflation, "the risks to the forecast seem primarily to the upside. Given the current level of inflation, a failure of inflation to moderate as expected would be especially troublesome."

Here is the entire Speech by Chairman Ben S. Bernanke on the economic outlook.

Update: See Calculated Risk for a different perception of Bernanke's speech.

The Role of the Fed in Financial Crises

William Poole on what the Fed should do when financial instability strikes: "In most cases, nothing":

Responding to Financial Crises: What Role for the Fed?, by William Poole, St Louis Fed President: I am delighted to return to Cato, an organization with which I feel a natural affinity, especially through Bill Niskanen with whom I served as a member of the Council of Economic Advisers a quarter century ago. ... The key issue then, as today, is time inconsistency. It seems to make sense in the middle of a financial crisis for someone to bail out a failing firm or firms. However, the inconsistency is that, however sensible a bailout seems in the heat of crisis, bailouts rarely make sense as a standard element of policy. The reason is simple: Firms, expecting aid if they end up in trouble, hold too little capital and take too many risks. As every economist understands, a policy of bailing out failing firms will increase the number of financial crises and the number of bailouts. Along the way, the policy also encourages inefficient risk-management decisions by firms. ...

Federal disaster relief policy is exhibit A, but every company, financial or otherwise, knows that if it gets into trouble it is at least worth a major effort to attempt to secure a bailout because there is always a significant probability of success. ...

Now for the topic of the panel. What should the Fed do when financial instability strikes?

In most cases, nothing. The important principle here is support for the market mechanism rather than support for individual firms. The Fed has, appropriately, permitted many highly visible firms to fail without any attempt to provide support, or even any particular comment except to say that it does not intend to intervene.

Of course, the Fed has intervened from time to time. One important case was the provision of additional liquidity and moral support to the markets when the stock market crashed in 1987. The Fed also provided support to the market at the time of the near failure of Long Term Capital Management in 1998. In both cases the Fed cut the federal funds rate, which provided evidence to the markets that the Fed was on the job and prepared to provide extra liquidity as needed. I realize that the Fed’s presence in the negotiations for additional financial support for LTCM from other firms is controversial; I would simply emphasize that the Fed itself did not provide any financial support and, in my opinion, would not have done so if the effort to encourage support from other firms had failed.

Some observers have viewed the large expansion of hedge funds as a rising danger to financial stability, requiring additional regulation and Fed readiness to intervene. I myself believe the dangers of systemic problems from hedge fund failures are vastly overrated. The hedge fund industry is indeed large but it is also highly diverse and competitive. Many and perhaps most of the large positions taken by individual firms have other hedge funds on the opposite side of the transactions. I trust normal market mechanisms to handle any problems that might arise. ...

A very interesting case arose with the terrorist attacks on 9/11. Thinking back to my academic years before coming to St. Louis, I recall no discussion or journal articles analyzing the possibility that the payments system might crash because of physical destruction. But that is what nearly happened, because the Bank of New York, a major clearing bank, was disabled when the twin towers came down. Moreover, trading closed in the U.S. Treasury and equity markets, and banks were unable to transfer funds because the Bank of New York was not functioning. With normal sources of liquidity shut down, many banks faced the prospect of being unable to meet their obligations. The Fed’s provision of funds through the discount window and in other ways prevented a cascading of defaults around the world. No private entity would have been able to provide liquidity on such a massive scale.

I do not know what a totally unanticipated future systemic shock might be but am sure that the Fed needs to be ready to respond, and to some extent, invent the appropriate response on the fly to a currently unimaginable shock. That is surely what a central bank is for, among other things. At the same time, a great reluctance to intervene will serve the economy well in the long run.

I can summarize my position very succinctly. The Fed has a responsibility above all to maintain price stability and general macroeconomic stability to reduce the likelihood of economic conditions that would be conducive to financial instability. Included in this responsibility is provision of advice to Congress on needed legislative action to deal with possible risks. The largest of these risks on my radar screen arises from the thin capital positions maintained by government-sponsored enterprises and the ambiguity of whether Congress would or would not act to bail out a troubled firm. The time to deal with potential financial instability caused by structural weaknesses of the GSEs and their regulatory regime is before instability strikes. ...

Although prevention is the most important of the Fed’s responsibilities, without question the Fed needs to be prepared to provide liquidity support should markets be in danger of ceasing to function. We know a lot about this subject and have in place deep contingency arrangements to assure that the Fed itself will remain operational at all times. I do not see any way that these functions could be privatized; I believe the markets do have confidence that the Fed has necessary legal authority and the internal strength to act as necessary. That said, the Fed’s reluctance to act is also an important element of strength.

Mishkin: Globalization: A Force for Good?

The newest Fed Governor, Frederic Mishkin, gives his first speech. The topic, the globalization of financial markets, has been covered here recently in an commentary by Mishkin from the Financial Times, and an interview from Crooked Timber about his book on the same topic. Here's one small section of the speech:

Globalization: A Force for Good?, by Frederic S. Mishkin, Board of Governors: ...Can more globalization--in particular, financial globalization--be a force for good?

The globalization of trade and information over the past half century has lifted vast numbers of the world's people out of extreme poverty. Despite the doom and gloom that you often hear, world economic growth since the Second World War has been at the highest pace ever recorded. What we are seeing in countries that are export oriented, and thus able to take advantage of the present age of globalization, is a reduction in poverty and a convergence of income per capita toward industrial-country levels. In India and China, for example, globalization in recent years has lifted the incomes of more than 1 billion people above the levels of extreme poverty. ...

The benefits of globalization of trade in goods and services are not controversial among economists. Polls of economists indicate that one of few things on which they agree is that the globalization of international trade, in which markets are opened to flows of foreign goods and services, is desirable. But financial globalization, the opening up to flows of foreign capital, is highly controversial, even among economists...

For example, in his best-selling book Globalization and its Discontents, Nobel laureate Joseph Stiglitz is very critical of globalization because he sees the opening up of financial markets in emerging-market economies to foreign capital as leading to economic collapse. Even Jagdish Bhagwati, one of the leading economists defending globalization of trade (after all, his book is titled In Defense of Globalization), is highly skeptical of financial globalization, stating that "the claims of enormous benefits from free capital mobility are not persuasive." George Soros, the prominent financier, opens his book On Globalization with a chapter entitled "The Deficiencies of Global Capitalism."

One reason for the controversy is that opening up the financial system to foreign capital flows has led to some disastrous financial crises causing great pain, suffering, and even violence. These crises can arise when bad policies encourage excessive risk taking by financial institutions, policies that rich elites in the developing countries often advance for their own profit. There are those (including Stiglitz and Bhagwati) who put the primary blame for the failures of financial globalization in emerging-market economies on outsiders, specifically on the International Monetary Fund, or what they refer to as the Wall Street-Treasury complex. The evidence has brought me to the conclusion that institutions like the IMF or the U.S. Treasury are not primarily to blame, although neither are they blameless--public and private financial institutions active in the international capital markets have often aided and abetted poorly designed financial globalization, although that was not their intention. ...

We have seen that the repression of the financial system is a great obstacle to economic growth and the reduction of poverty in poorer countries. Yet, if financial development offers such tremendous benefits, why doesn't every country jump on the path to growth and prosperity by imitating the institutions of the advanced economies? Part of the answer is that good institutions need to be home-grown; institutional frameworks that have been developed in the rich countries frequently do not translate well to poorer countries. This is a lesson that many in the advanced economies of the world have yet to learn. The development of good institutions in the advanced countries took hundreds of years; as they grew, they adapted to local conditions. Poor countries must develop their own institutions, and the citizens of these nations must feel they have ownership of the institutions or the institutions will be ineffective and short lived. ...

I will conclude by saying that those who oppose any and all globalization have it completely backward: Protectionism, not globalization, is the enemy. It is true that, by itself, globalization in both finance and trade is not enough to ensure economic development and that economies must position themselves to handle foreign capital flows. But as I said, to be against globalization as such is most assuredly to be against poor people, and this is presumably not the position antiglobalizers want to take. Developing countries cannot get rich unless they globalize in both trade and finance. Making financial flows truly worldwide and creating robust, efficient financial markets in developing countries is not optional: It needs to be the focus of the next great globalization. In sum, I want to challenge those who oppose globalization to rethink their objections. As Kofi Annan, the Secretary General of the United Nations, has put it, "The main losers in today's very unequal world are not those who are too much exposed to globalization. They are those who have been left out." Rather than opposing or limiting globalization, we in the rich countries and those in the developing countries must, as a moral imperative, work together to make globalization work for the general good of people all over the world.

Bernanke: Will We Treat Future Generations Fairly?

Ben Bernanke describes the challenges ahead due to an aging population and steps that might be taken now to prepare for the changes and minimize the transition costs. Much of the discussion is in terms of generational equity and the tradeoff between making hard choices now and shifting the burden of an aging population to future generations:

The Coming Demographic Transition: Will We Treat Future Generations Fairly?, by Ben Bernanke, Chair of Federal Reserve System: In coming decades, many forces will shape our economy and our society, but in all likelihood no single factor will have as pervasive an effect as the aging of our population. ...

This coming demographic transition is the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Although demographers expect U.S. fertility rates to remain close to current levels for the foreseeable future, life expectancy is projected to continue rising. ...

[It's] difficult to describe increasing life expectancy as bad news. Longer, healthier lives will provide many benefits for individuals, families, and society as a whole. However, an aging population also creates some important economic challenges. For example, many observers have noted the difficult choices that aging will create for fiscal policy makers in the years to come, and I will briefly note some of those budgetary issues today. But the implications of demographic change can also be viewed from a broader economic perspective. As I will discuss, the broader perspective shows clearly that adequate preparation for the coming demographic transition may well involve significant adjustments in our patterns of consumption, work effort, and saving. Ultimately, the extent of these adjustments depends on how we choose--either explicitly or implicitly--to distribute the economic burdens of the aging of our population across generations. Inherent in that choice are questions of intergenerational equity and economic efficiency, questions that are difficult to answer definitively but are nevertheless among the most critical that we face as a nation.

"Wagner’s Music is Better Than it Sounds"

The title expresses Dallas Fed President Richard Fisher's assessment of the U.S. economy -- it's better than it sounds -- except for inflation, which he believes may be a problem. His bottom line?:

While I am well aware of the risks to economic growth, the history of inverted yield curves, and the ever present possibility of exogenous shocks in a politically hazardous world, the “balance of risk,” in my book, is still tilted to the inflation side of the equation. ... While the inflation risk ... is very much on my mind, it is my considered judgment that the recent tempering of U.S. economic growth to a more sustainable rate, combined with the lagged effects of our 17 prior quarter-point rate increases, should act to lower the inflation rate over time. However, if this proves not to be the case, appropriate action will have to be taken.

Fisher's speech is below, but first here's the national outlook from the Dallas Fed:

Hedge Fund Worries

New York Fed president Tim Geithner is worried that market failures such as "lack of information, incentive conflicts and moral hazard" are causing risk levels in hedge fund markets to grow and, if the growth of risk continues, increased regulation of the markets may be required. He's cautious because, "With too much government intervention, innovation is constrained and the system is stifled." However, "With too little, the probability of systemic crisis may rise to levels that are unacceptably high":

NY Fed chief warns on hedge funds, by David Wighton and Peter Thal Larsen, Financial Times: Hedge funds may need to be regulated because of the increasing risk they could pose to the financial system, according to the head of the New York Federal Reserve... Geithner ... said supervision of core banks and investment banks had encouraged the transfer of risk to unregulated institutions such as hedge funds.

Their growth was now increasing the risk that if they ran into problems, it could damage the regulated core. ... Mr Geithner said that, for the moment, regulators should continue to focus on encouraging the banks and brokers that lend to hedge funds to improve their “counterparty discipline” of the funds.

But, over time, the growth in hedge funds “will force us to consider how to adapt the design and scope of the supervisory framework to achieve the protection against systemic risk that is so important to economic growth and stability.” ...

Mr Geithner ... [said] ... the ... effectiveness of this market discipline may be compromised by “market failures” such as lack of information, incentive conflicts and moral hazard. “Supervision and regulation have the potential to help mitigate these sources of market failure,” he said.

We don't know enough about these markets, particularly their vulnerability to large shocks. [Update: The WSJ's Greg Ip has more].

Are We There Yet?

San Francisco Fed President Janet Yellen indicates that, as of now, she sees no reason to raise rates further:

Support for Fed Pause Was Broad Among the 12 Regional Banks, by Greg Ip, WSJ: Just two of the Federal Reserve's 12 regional banks [Richmond and Philadelphia] wanted to raise interest rates ahead of the central bank's policy meeting last month, suggesting support for the Fed's rate "pause" is relatively broad...

The Fed discount-rate minutes add to the evidence that the Fed is willing to leave rates alone for the time being to see how growth and inflation evolve. ... Janet Yellen added to that sentiment Thursday, telling an audience ... that "it appears that the current stance of policy will move inflation gradually back to the comfort zone while giving due consideration to the risks to economic activity." Markets put just a 11% probability on a rate increase at the Fed's Sept. 20 meeting. ...

Bernanke: A Short History of Global Economic Integration

Ben Bernanke opens the Fed conference at Jackson Hole with a discussion about economic integration. The talk has two sections, the history of economic integration, and the current episode of economic integration. Once conclusion from the history section is that, while economic integration is beneficial overall, the costs are not shared equally:

A third observation is that social dislocation, and consequently often social resistance, may result when economies become more open. An important source of dislocation is that--as the principle of comparative advantage suggests--the expansion of trade opportunities tends to change the mix of goods that each country produces and the relative returns to capital and labor. The resulting shifts in the structure of production impose costs on workers and business owners in some industries and thus create a constituency that opposes the process of economic integration. More broadly, increased economic interdependence may also engender opposition by stimulating social or cultural change, or by being perceived as benefiting some groups much more than others.

His quote of Martin Luther from 1524 is one illustration of this:

When to Hit the Pause Button?

The Wall Street Journal has a summary of Ben Bernanke's written remarks from his testimony before the Senate Banking Committee. The message is the same, growth is moderating but inflation remains a concern:

Link to video of hearing (CSPAN - expires in 15 days).

Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Brian Blackstone and Campion Walsh, WSJ: Federal Reserve Chairman Ben Bernanke said Wednesday a moderation in U.S. growth "now seems to be under way," which "should help to limit inflation pressures over time."

While noting that some of the recent rise in underlying inflation is due to technical factors and that inflation expectations "remain contained," inflation remains "of concern" to policy makers, Mr. Bernanke said in semiannual monetary policy testimony prepared for delivery to the Senate Banking Committee. ...

Also, CPI figures were released today and core inflation was up a bit more than anticipated adding to inflation worries:

Earlier Wednesday, the Labor Department reported that the June consumer price index increased 0.2%. Excluding food and energy, consumer prices advanced 0.3%, the fourth-straight rise of that size. Fed chairmen receive major economic reports, including consumer prices, the evening before they're released to the public. ...

The Wall Street Journal also reports market reactions:

Markets reacted immediately to the numbers. Stock futures gave up early gains, on the expectation the Fed will be more likely to raise interest rates again in August. The federal-funds futures contract at the Chicago Board of Trade, where traders bet on future Fed policy, priced in a 90% chance of a quarter-point August increase, compared with 68% before the consumer-price release....

Those of us who would like to see the Fed take a breather in its rate hike campaign to avoid overshooting aren't getting a lot of help from the inflation reports.

Update: The markets have changed their mind after hearing Bernanke's comments:

After struggling amid concerns about the Mideast conflict and rising oil prices, stocks surged Wednesday after Federal Reserve Chairman Ben Bernanke indicated in Congressional testimony that the central bank may stop raising interest rates soon.

The comments, delivered before the Senate Banking Committee, reversed earlier concerns about further rate increases inspired by a report that showed a measure of retail price inflation is rising at a faster pace than expected.

I'll update this later when summaries of Bernanke's remarks in response to questions are available.

Note: If you don't have a WSJ subscription, here are links to Bloomberg reports:

• Bernanke, Hinting at Pause, Says Fed to Mind Effects of Prior Rate Boosts
• Stocks in U.S. Climb on Fed Chief's Comments; Shares of IBM, JPMorgan Gain
• Treasuries Rise After Bernanke Says `Moderation' of U.S. Economy Under Way
• U.S. Consumer Prices Gain 0.2 Percent; Housing Starts Fall as Demand Slips

Update: Tim Duy is working an a new Fed Watch for tomorrow, so I will let him put the remarks into perspective. For now, here's Greg Ip and Mark Whitehouse of the WSJ with a summary of Bernanke's remarks:

Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Greg Ip and Mark Whitehouse: Federal Reserve Chairman Ben Bernanke called rising inflation a "concern" but predicted an economic slowdown would reverse that rise. Markets took those words to mean that, for now, the Fed will worry more about slowing growth and stop raising interest rates soon. Bond yields fell and the Dow Jones Industrial Average soared Wednesday.

Mr. Bernanke spoke the same day as the government reported inflation rose and home construction fell last month, underlining the opposing risks confronting the central bank.

"The recent rise in inflation is of concern," Mr. Bernanke told the Senate Banking Committee. "Possible increases in [energy] and other commodity prices remain a risk to the inflation outlook."

But Fed policy makers "project that growth … should moderate" to its long-term potential rate "both this year and next. Should that moderation occur as anticipated, it should help to limit inflation pressures over time."

Part of Mr. Bernanke's job Wednesday was to blunt accusations of sending inconsistent messages since taking the post on Feb. 1. ... Wednesday, he appeared to seek ... balance by acknowledging that inflation was too high but laying out a forecast of slowing growth and stable energy prices that would allow inflation to fall back. And, in an important break from the past few years, he gave no explicit signal about how the Fed would move interest rates to achieve that forecast, forcing markets to decide for themselves...

Update: See David Altig at macroblog for an analysis of today's price report.

Bernanke Testimony on the Economic Outlook

First, here's a video and link to a text version of his prepared testimony:

Download RealPlayer if the video is not playing above.

The Fed is continuing to communicate the meaning of a pause in rate hikes should it occur, indicating that the Fed is looking to pause once incoming data on expected growth and inflation support such a move. Repeating what Tim Duy said
in a recent Fed Watch:

Fed Minutes Say the End is Near

The FOMC meeting minutes for Bernanke's first meeting as chair were released. If you are looking for evidence the Fed will move to 5% and then pause, it's there. But if you feel there is a chance rates will go higher, statements about being vigilant toward inflation expectations and about risks being tilted slightly toward worry about inflation give support for that position as well. Putting the two together, the Fed wants us to get their message, repeated frequently lately with Janet Yellen as the latest messenger, that further rate moves beyond the move to 5% at the next meeting are data (and I would add forecast) dependent:

Fed Members Saw End of Rate Rises Likely 'Near' in March, Minutes Show, Bloomberg: Most Federal Reserve policy makers considered the end of their interest rate increases ''was likely to be near,'' while also citing the need for vigilance against inflation, minutes of their March meeting showed.