Will the Fed try to hide evidence and the consequences of the greatest monetary inflation of all time?
"Mr. Bernanke said the likelihood of a serious recession has fallen. 'Although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,' he said.
While he argued that the effects of low interest rates, improving market conditions and a slow easing of problems in the housing market should help the economy later this year, the threat from declining home prices and high energy prices mean 'that growth risks remain to the downside.'
That comment suggests the Fed is unlikely to raise interest rates in the foreseeable future. But Mr. Bernanke didn't eliminate the possibility altogether, turning his concern about inflation up a notch from remarks last week, in the wake of a big jump in oil and gasoline prices. 'The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,' he said. The Fed 'will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.'
The broader text of his remarks, which dealt largely with academic challenges in the study of inflation, suggest Mr. Bernanke doesn't yet see the evidence of rising inflation expectations and a wage-price spiral that would require an imminent tightening of monetary policy. He said rising raw material costs had yet to pass through more broadly to underlying labor costs, 'in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and future developments in this regard will bear close attention.'
Mr. Bernanke defended the use of futures markets to forecast future energy cost, even though those markets have underestimated the future cost of energy. 'I do not think it is reasonable, when forecasting commodity prices, to ignore the substantial amounts of information about supply and demand conditions that are aggregated by futures markets.'
Meanwhile, in his speech in New York, Mr. Geithner said soaring demand for energy and resulting price increases are pressuring economies in a way that ultimately may push interest rates higher around the world. 'Containing the risks in what is globally a less benign inflation environment is going to probably require tighter monetary policy on average around the world,' Mr. Geithner said in response to a question at the Economic Club of New York.
In the U.S., Mr. Geithner said, the Fed has lowered rates to provide insurance against a deeper economic slowdown 'without taking too much risk that underlying inflation is going to accelerate over time.'
He said the Fed doesn't see evidence of 'a significant acceleration of underlying inflation' in goods and services or wages, nor is there a 'substantial erosion' in the public's expectations for inflation long term."