In all the commentary about Ben S. Bernanke's recent speech in Jackson Hole, Wyo., little attention has been paid to six crucial words: "in a context of price stability." Those words concluded a discussion by Mr. Bernanke, the Federal Reserve chairman, of what tools the central bank could consider appropriate to promote a stronger economic recovery.
Ordinarily, a central banker's affirming the importance of price stability is not headline news. But consider the setting. There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.
So now we are beginning to hear murmurings about the possible invigorating effects of "just a little inflation." Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the "animal spirits" of business, or so the argument goes.
It's not yet a full-throated chorus. But remarkably, at least one member of the Fed's policy making committee recently departed from the price-stability script.
David Fuller's view It was almost certainly Chicago Fed President
Charles Evans comment, quoted in The Weekly View paragraph which I posted last
Wednesday, which has concerned Paul Volcker. However, the people buying US Treasuries
do not appear to be concerned, judging from US
10-Yr and 30-Yr T-Bond yields.
In fact, they appear to be betting that Mr Bernanke will continue to buy in
an effort to keep yields low.