Wednesday, April 27, 2011

Bernanke Q&A--It's All in the Framing of the Question

Ben Bernanke did his first post-FOMC Q&A. Not surprisingly he got a lot of questions regarding concerns over inflation.  Unfortunately, most of these inflation questions were premised on the assumption that inflation is always a bad outcome that must be avoided at all cost.  For example, Robin Harding of the FT asked Bernanke what the Fed could do to prevent inflation expectations from increasing.  None of the reporters seemed to grasp and Bernanke failed to explain that a period of catch-up inflation--which really is just a symptom of catch-up nominal spending--could do the economy some good without jeopardizinng long-run inflation expectations.  All the Fed would need is to set an explicit level target and run with it as I explain here.  And make no mistake, the Fed has the power to make a difference.  Just look at how successful the original QE program was in the 1930s, a time of far worse economic conditions. 

Allowing these reporters to frame the discussion the way they did is all the more frustrating given Bernanke's past research on Japan.  In that work, Bernanke calls for price level targeting (though NGDP level targeting would be better) that would allow catch-up inflation to the pre-crisis trend. Why not the same now?  If only one of the reporters had asked that question! Time for Jon Hilsenrath, Neil Irwin, Robin Harding and others Fed reporters to man up and call Bernanke on this point. Better yet, time for Bernanke to man up and do the speech Ezra Klein hoped he would do.

[Update: Niklas Blanchard, Matthew Yglesias, Paul Krugman and Marcus Nunes share my disappointment.]


  1. David
    I do (share the dissapointment) too!

  2. Marcus, thanks for the heads up. I added you to the list.

  3. The hyped "inflation threat" seems to be a media favorite--perhaps aided and abetted by the usual talk radio monkeys.

    Let's see--we had deflation in 2009-2010. We now have inflation a little below target.

    A slug of real estate inflation would do wonders across the USA, for consumers confidence, for banks, for small businesses (they borrow against collateral, usually real estate).

    Commodities and US monetary policy have become de-linked.

    Bernanke is not a compelling public speaker, and does not frame the setting.

    Still, he could start decreasing the amount of interest paid on bank reserves are this point. I think that is just a little esoteric for the media to even notice.