In a speech on his U.S. outlook on Tuesday, the Fed chairman focused on price stability, saying that the recovery hasn't stalled
What really has Federal Reserve Chairman Ben Bernanke concerned? He provided some hints on Tuesday, speaking at the International Monetary Conference about the U.S. economic outlook. Considering the disappointing jobs report last week, falling home prices, and weakening consumer sentiment, you might think that he would have spent most of his time talking about challenges the recovery faces. Instead, however, he focused on why we shouldn't worry about commodity prices or inflation.
Just a Bump on the Road to Recovery
About the first quarter of Bernanke's speech was dedicated to his outlook for U.S. growth. Essentially, he hasn't changed his view. He still expects the recovery to be slower than everyone would like. Although the economic indicators have been somewhat rotten lately, this fits into the narrative of an uneven, "frustratingly slow" recovery.
The economy has taken a step back recently for two main reasons, according to Bernanke. One is the increase in commodity prices, which has taken a toll on consumer sentiment and spending. The other is supply chain issues in Japan stemming from the nation's severe earthquake. Since he expects both of these effects to dissipate in coming months, he believes that the U.S. economy to proceed forward at a brisker pace later this year.
The key is "to move quickly to enact a credible, long-term plan for fiscal consolidation."
Of course, there are real headwinds that will keep the recovery slower than we'd like, says Bernanke. One big one is housing. In most recoveries, this sector helps to create jobs. It isn't this time around. Public sector troubles, stemming from budgetary woes on federal, state, and local levels, will also slow the pace of the recovery.
In this context, he also addresses Washington's recent concern with deficits. He says the key is "to move quickly to enact a credible, long-term plan for fiscal consolidation" (his emphasis). Immediate budget cutting could threaten the recovery, but putting a plan in place now to cut deficits in the years to come will assure investors that the U.S. will return to a sustainable fiscal path.
Inflation and Prices
Surveying his speech, it appears that about 60% focused on prices (as the word cloud above helps to show). Bernanke took time to explain why he still considers inflation to be under control, despite recent jumps in gasoline and other commodity prices. He had two central reasons. First, the U.S. labor and product markets aren't operating at full strength, so demand won't drive prices much higher. Second, inflation expectations haven't changed, which is to say that investors don't expect prices to rise aggressively in the months or years to come. He also took comforting in data that suggests that oil and commodity prices have declined slightly in recent weeks.