By Denny Gulino and Rica Shelton Caughman

On inflation, “the one exception to the general observation that
inflation has been coming down is that globally traded commodities like
energy, foods and other commodities have been going up pretty sharply,”
Bernanke said, driven by the demand of emerging markets which have been
growing “quite quickly.”

“Our research and our experience, though, suggests that generally
speaking, when you have a situation like you have today when there’s a
lot of slack in the economy, a lot of excess supply, that its very, very
difficult for producers to push through those costs to the final
consumer.”

Besides, he said, the major part of producers’ costs, that for
labor, “and wages have been going up pretty slowly. Productivity has
been growing relatively strongly which means that overall the cost of
labor per unit of production is actually falling.”

“We do believe that because of the great deal of slack in the
economy that inflation is likely to stay quite low going into next year
although commodity prices are an issue we are watching very carefully,”
he said.

“I think it’s going to take at least some growth, some further
reduction in slack before we begin to see any kind of inflation
pressure,” Bernanke said. “At that point, of course, we’re going to have
to be sure to modify our amount of stimulus, to make sure we maintain
stable prices in the long term.”

Bernanke recounted the Fed’s exit strategies without hinting how
long would be the wait to use them. “The main thing we need to do when
it’s time to tighten monetary policy is to raise interest rates,”
Bernanke told the students. If the Fed wanted to raise the short-term
interest rate “basically what we would do is just agree to pay interest
on reserves.” The banks would then have “no incentive” to lend the
reserves elsewhere.

“By raising that interest rate we can essentially raise short-term
interest rates throughout the system,” he said.

“Some reserves could leak out,” he conceded, so the Fed could turn
to other tools, creating time deposits forcing banks to freeze reserves
for three months or more. The Fed can also replace reserves through
reverse repurchase agreements.

“If for whatever reason we want to do additional draining what we
can do, of course, is sell the assets” tightening policy in two ways,
raising rates and “automatically” extinguishing reserves.

“We have plenty of tools and we have done a lot of thinking and
work to make sure the tools are tested,” Bernanke said.

-more-

** Market News International Washington Bureau: 202-371-2121 **

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