–Retransmitting Story Published 17:55 ET Wednesday, Fixing Typo

By Steven K. Beckner

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke vowed
Wednesday that the Fed will tighten monetary policy “at the appropriate
time,” but when that time will come remains anyone’s guess.

Bernanke, talking to reporters following a Federal Open Market
Committee monetary policy meeting for the first time ever, echoed the
FOMC statement in saying that commodity-driven increases in headline
inflation are likely to prove “transitory,” while vowing to carefully
monitor both inflation and inflation expectations.

Ultimately, he said, the Fed must act to keep inflation
expectations and inflation itself under control, but meanwhile there is
the other side of the Fed’s statutory dual mandate for the FOMC to worry
about — namely maximizing employment. So, for the foreseeable future, he
said, the FOMC has “important reasons … to maintain a highly
accommodative monetary policy.”

The Fed chief left open the possibility that the Fed could continue
to reinvest proceeds of maturing mortgage backed securities to prevent
shrinkage of the balance sheet and of bank reserves well beyond the
completion of the second round of quantitative easing at the end of
June. He said a discontinuation of MBS reinvestment could well be an
early step in the “exit” from monetary accommodation, but again gave no
hint that it’s coming soon.

Bernanke did not sound greatly concerned about recent weakness of
the dollar, saying it is largely a reversal of early “safe haven” dollar
appreciation and saying that the best thing the Fed can do to help the
dollar is to fulfill its dual mandate.

As for Standard & Poor’s warning that the U.S. government could
lose its Triple-A rating, he said S&P was merely recognizing what
everyone already knew — that the U.S. is in a bad fiscal situation. But
he expressed the hope that S&P’s warning could spur Congress and the
White House to greater efforts toward long-term deficit reduction.

Bernanke took reporters’ questions for nearly an hour after the
FOMC issued a stand pat policy statement and after the Fed released the
FOMC’s revised quarterly, three-year economic projections.

In revising their economic projections, the Federal Reserve
governors and Federal Reserve Bank presidents arrived at some rather
anomalous changes. Although they revised down their forecast for GDP
growth, they lowered their unemployment estimates. At the same time,
they increased their inflation projections.

GDP is now projected to grow 3.1% to 3.3% this year — down from
3.4% to 3.9% in the January forecast. Next year’s growth forecasts have
also been revised lower from 3.5% to 4.4% to 3.5% to 4.2%. And 2013 GDP
growth is projected at 3.5% to 4.3% — down from 3.7% to 4.6%.

Meanwhile, unemployment, which has been falling since January, is
projected to continue falling more than previously projected. The
unemployment rate is projected at 8.4% to 8.7% this year and 7.6% to
7.9% next year. By contrast, in January, it was projected at 8.8% to
9.0% in 2011 and 7.6% to 8.1% in 2012.

Overall inflation, as measured by the price index for personal
consumption expenditures, is projected at 2.1% to 2.8% this year — up
sharply from January’s forecast of 1.3% to 1.7%. The core PCE is
expected to rise 1.3% to 1.6% this year, up from 1.0% to 1.3%. Both
measures are expected to recede next year and beyond and converge toward
the FOMC’s “longer run” forecast of 1.7% to 2.0% inflation.

Bernanke stopped short of calling the longer run inflation forecast
an inflation target, but said it represents the level of inflation which
the Fed considers most “consistent” with its price stability mandate.

Although FOMC members increased their forecast of inflation, even
as they lowered their projections for economic growth, Bernanke
continued to downplay inflation risks. Echoing the FOMC statement,
saying higher gasoline prices are pushing up overall inflation but
insisting that will prove “transitory” provided that people’s inflation
expectations remain stable.

Bernanke repeatedly stressed the importance of keeping medium-term
inflation expectations anchored, prompting MNI to ask whether,
irrespective of public inflation psychology, the Fed might be providing
the “monetary tinder” for inflation by keeping the federal funds rate
near zero and continuing to ease quantitatively.

“Well, we view our monetary policies as being not that different
from ordinary monetary policy,” he responded. “It’s true that we used
some different tools, but those tools are operating through financial
conditions and we have a lot of experience understanding how financial
conditions changes in interest rates changes in stock rates, so on, how
they affect the economy, growth, et cetera.”

“We are monitoring the state of the economy, watching the evolving
outlook and our intention as is always the case is to tighten policy at
the appropriate time to ensure that inflation remains well controlled;
that we meet that part of our mandate while doing the best we can to
ensure also that we have a stable economy and a sustainable recovery in
the labor market,” Bernanke continued.

“So the problem is the same one that central banks always face,
which is choosing the appropriate path of tightening at the appropriate
stage of the recovery,” he went on. “It’s difficult to get it exactly
right, but we have a lot of experience in terms of what are the
considerations and the economics that underlie those decisions.”

“So we anticipate that we will tighten it at the right time and
that we will there by allow the recovery to continue and allow the
economy to return to a more normal configuration,” Bernanke added. “At
the same time keeping inflation low and stable.”

Before opening the floor to questions, Bernanke set the stage by
observing that “monetary policy affects output and inflation with a lag.
So current policy actions must be taken with an eye to the likely future
course of the economy. Thus the committee’s projections of the economy,
not just current conditions alone, must guide its policy decisions.”

Because of these lags, Bernanke said the FOMC “must focus on
meeting its mandated objectives over the medium term, which can be as
short as a year or two but may be longer depending on how far the
economy is initially from conditions of maximum employment and price
stability.”

Explaining how the FOMC intends to go about meeting those goals,
Bernanke said, “To foster maximum employment the committee sets policy
to try to achieve sufficient economic growth to return the unemployment
rate over time to its long-term normal level.”

“At 8.8% the current unemployment rate is elevated relative to that
level and progress towards more normal levels of unemployment seems
likely to be slow,” he said.

“The substantial ongoing slack in the labor market and the
relatively slow pace of improvement remain important reasons that the
committee continues to maintain a highly accommodative monetary
policy,” he added.

At the same time, he said the FOMC “seeks to achieve a mandate
consistent inflation rate which participants” of “2% or a bit less.”

“Although the recent surge in commodity prices led to pick up
somewhat in the long-term, the committee predicts inflation will return
to consistent levels in the medium term,” Bernanke said. “Consequently,
the short-term increase in inflation has not prompted the (FOMC) to
tighten policy at this juncture.”

Bernanke said the Fed’s expectation that inflation will remain
under control in the long term is predicated on the belief that
“households and firms expect inflation to return to a mandate consistent
level in the medium term.” If that holds true, he said “increased
commodity price are unlikely to produce secondary round effects in which
inflation takes hold in non-commodity price and in nominal wages.”

“Thus besides monitoring inflation itself the committee will pay
close attention to be inflation expectations and to possible indications
of second round effects,” he said.

In an effort to undergird inflation expectations, Bernanke said the
FOMC continued its “ongoing discussion of the available tools for
removing policy accommodation at such time as that should become
appropriate.” And he said “the committee remains confident that it has
the tools that it needs to tighten monetary policy when it is determined
that economic conditions warrant such a step.”

“In choosing the time to begin policy normalization as well as the
pace of that normalization, we will carefully consider both parts of our
dual mandate,” Bernanke said.

-more- (1 of 3)

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

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]