By Steven K. Beckner

Bernanke told the Senate Banking Committee in his March 1 Monetary
Policy Report to Congress that “sustained rises in the prices of oil or
other commodities would represent a threat both to economic growth and
to overall price stability, particularly if they were to cause inflation
expectations to become less well anchored.”

“We will continue to monitor these developments closely and are
prepared to respond as necessary to best support the ongoing recovery in
a context of price stability,” he said.

Of course, that left lots of room for interpretation, so in
response to questions, Bernanke said the Fed will begin withdrawing
stimulus “once we see the economy is in a self-sustaining recovery and
employment is begining to improve and labor markets improving and
meanwhile that inflation is stable, approaching roughly 2% or so.” He
said the Fed is “quite aware” that it must not “stay too easy too long”
and will “move well in advance of the time that the economy is
completely back to full employment.”

And if inflation begins moving up too fast, irrespective of where
unemployment is?

Bernanke said “we have rejected” the notion that inflation should
be allowed to run above target for awhile. “We are committed to not
letting inflation go above 2%,” he declared.

Bernanke said the Fed is “looking very carefully” at a variety of
measures of inflation and inflaiton expectations and does “not have any
illusion that allowing inflation to rise would help” the economy.

Even so, it won’t be easy to modulate monetary policy to combat
inflation without unduly restraining recovery. It may try to firm policy
enough to calm inflation fears while leaving monetary policy relatively
accommodative.

This time, it has the luxury of having two different policy
channels it can use. It can raise rates or it can reduce its balance
sheet — or some combination of the above. Bernanke, Dudley and others
have repeatedly expressed their willingness and ability to use their
“exit tools” to tighten effectively.

But it will still come down to a matter of judgment as to the
timing and pace of tightening. And that job is not getting any easier
as the crosscurrents in the global economy reach tsunami proportions.

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** Market News International **

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