Ben Bernanke: Turning a Blind Eye to Weak US Data?

June 9, 2008

On Monday evening, Bernanke reiterated the Federal Reserve’s commitment to contain inflation, driving the US dollar higher in what would otherwise have been a quiet Asian trading session. Over the past 24 hours,the US government has come out with all guns blazing as US Treasury Secretary Paulson, Federal Reserve Governors Geithner and Fisher have commented on the value of the US dollar. Their public agreement is a sign that the US Government wants the dollar rise and they are jawboning it at every opportunity.

With gasoline prices now above $4 a gallon across the nation, the central bank has made reducing inflationary pressures their number 1 priority. According to Ben Bernanke’s comments Monday evening (Full Speech), the FOMC 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.” Bernanke even went so far as to say that despite the fact that the unemployment rate jumped from 5 percent to 5.5 percent, which was very negative since it marked the largest monthly decline in over 20 years, the US economy has skirted a major decline.

In all likelihood, the central bank governor’s less bearish comments about the outlook US economy is an excuse to keep monetary policy unchanged as it is too early to decide whether the US economy has indeed averted a more serious slowdown. The jump in gas prices is a major risk to consumer spending and it remains to be seen whether that will have a more serious impact on the overall economy.

Since the economy is not strong enough to raise interest rates, the Federal Reserve and US Treasury hopes that an appreciation of the US dollar would help to curb inflation.

Posted in Bernanke, Intervention, US Dollar, paulson