The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Bernanke is laying out again his view of the current state of the US economy and inflation outlook in his speech, that the economy is expanding moderately with obvious risks and inflation pressure is transitory. In addition, he is using the speech as his way to defend the Fed and its policies from the criticism they’ve received over what its done to the value of the US$ and commodity prices. On this, he attributes mostly the price moves to supply/demand imbalances and little to the deteriorating value of the US$. He specifically states, “since Feb ’09, oil prices have risen 160% and nonfuel commodity prices are up by 80%” while the tradeweighted dollar has fallen by about 15%.” Thus he concludes that the dollar’s decline can explain, at most, only a small part of this commodity rise. He takes no responsibility for Fed policy debasing the US$ as he thinks slow US growth and a persistent trade deficit are “more fundamental sources of recent declines in the dollar’s value.” He thinks the best way “to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability.” With respect to monetary policy and its response to the above, “the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed.” Instead of myself using this as another reason to be critical of Bernanke, you’ve heard it too many times before so I just wanted to more point out what he’s talking about today. Why the market sold off in the aftermath, I point out the futures started to roll 30 minutes before he started to speak.