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February 15, 2006
Chairman Bernanke's debut before Congress
Introductory remarks posted on Fed's website.
For the first time in almost 20 years, a new face greeted the House Financial Services Committee for the semi-annual monetary policy testimony. Overall, it was an engaging session. Chairman Bernanke was upbeat about the prospects for the economy in 2006 and 2007, tipping his hand a bit about the potential for even higher short term interest rates. He also pointed to the greater stability of the U.S. economy as being partly responsible for keeping long term inflation expectations (and therefore long term interest rates) in check.
The questioning is always the more interesting part of the session. His responses were brief and straightforward--a departure from the responses of his predecessor that was noticed by the committee. He answered questions on fiscal policy by pointing out that it is Congress's responsibility to choose the size of government and that tax revenues should reflect that choice. Some of his questioners on the committee might see this as taking the safe way out, but others outside the committee, myself included, find this approach preferable to having the Fed chair offer specific recommendations on fiscal policy.
He was well-prepared, almost scripted, for questions about the discontinuance of M3 and on his statements on inflation targeting. On questions of income inequality and wages, there was candor without offering specific policy recommendations. Overall, there was an air of openness throughout the questioning, but it was tempered by appropriate respect on Mr. Bernanke's part for the role of Congress in policy matters. Mr. Greenspan is a tough act to follow, and the committee had developed a unique relationship with the former Fed chairman. Nonetheless, I think the committee might have come away from today's testimony with a positive outlook on the relationship they will have with Mr. Bernanke over the next few years.
UPDATE: The Wall Street Journal quotes the last paragraph above along with statements from many other economists both business and academic. Most of the comments have to do with insights into the future of monetary policy that we might have gleaned from today's testimony. For example,
[Bernanke] is learning that Mr. Greenspan's Greenspeak, a totally dense and largely indecipherable approach to answering questions, really is required when dealing with Congress. So much for being clear. Being clear only gets you into trouble. So, what should we take away from the testimony? Mr. Bernanke believes that inflation is job one now and always. So, if there is to be a mistake made, it will be on the side of lower not higher inflation and therefore more rather than less tightening. -- Joel L. Naroff, president and chief economist, Naroff Economic Advisors
and...
No surprises today: He struck a hawkish tone, as expected. This is consistent with what we heard from his warm-up acts last week. Chicago Fed Prez Michael Moskow and Dallas Fed Prez Richard "8th Inning" Fisher struck similar notes. Moskow suggested that rates are "historically low," that inflation was "creeping into the core" CPI rate, and suggested that rates may need to "rise further beyond neutral" to kill inflation. We listened hard as we could to the new Fed head, but were unable to discern anything inconsistent with Moskow's speech. Bernanke stated that "resource utilization was rising, cost pressures increasing, and short-term interest rates still relatively low." That hardly implies a Fed nearly finished with their tightening cycle. -- Barry Ritholtz, Ritholtz Research; blog: The Big Picture
Naroff and Ritholtz are right on the money, but as Ritholtz says, "No surprises." I saw nothing in the prepared remarks or the questioning that causes me to alter my opinion on where the Fed is going to take interest rates. Wall Street took a while to parse it all and at the moment appears to have reached the same conclusion.
The question/answer period is always more interesting, and even more so for a new chair. Kash Mansori likes what he heard.
Bernanke generally provided answers about numerous topics (e.g. the deficit, the minimum wage, trade protection, the regulation of Fannie Mae, R&D, personal saving) that a large majority of professional economists would probably agree with. In that sense, I think that he will be a good representative of the profession's consensus, to the degree that there is one. And for the most part, I think that's probably a good thing in the world's most powerful central banker.
And that is precisely why I found myself nodding my head several times during the question/answer session. Bernanke gave answers that I would be comfortable giving in class or in an interview. On balance I do agree that is a good thing, and I think he will wear it well. But Mr. Bernanke will always have to remember that good academic answers don't always go over well in the media. Just ask Greg Mankiw.
Tomorrow, the Senate. I think Bernanke has set a good benchmark upon which to build his reputation going forward.
Posted by William Polley at February 15, 2006 11:51 AM
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Comments
Yes, but he no longer has a boss that does not want good answers.
Posted by: spencer at February 16, 2006 8:49 AM