One of the more interesting outcomes from Bernanke’s press conference today was the question asked by the NYTimes reporter who asked why the Fed wasn’t doing more to stimulate in order to bring down unemployment at a faster rate. Clearly the reporter was echoing his colleague Paul Krugman‘s argument that Bernanke the Fed Chairman was not following the advice of Bernanke the academic. Krugman is a outspoken Keynesian and thinks we are in a liquidity trap so you have to take his side with a grain of salt. Nevertheless the response from Bernanke was quite telling as it in our opinion took a key policy response in a Nominal GDP target which has been in consideration in economic circles as a way to close the output gap off the table.
Bernanke: I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction – a slightly increased pace of reduction in the unemployment rate?
The view of the committee is that would be very reckless. We have we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an un-anchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be tentative and perhaps doubtful gains on the real side would be, I think, unwise thing to do.
WOW. That is not an explicit denial of NGDP targeting but it sure sounds close as he referenced targeting higher inflation and not receiving “real” growth. This is correct in our view and a NGDP target was one of the biggest risks we saw in risk assets as we believed it would put significant pressure on multiples. Now not targeting NGDP is net/net bearish for earnings growth but it should be bullish for multiples or less bearish. In other words you aren’t going to get any 6% nominal growth but you also won’t have the 4% inflation which would likely rock the bond market and crush multiples.
Bernanke gets a lot of heat for being so dovish but we think this was one of the more hawkish moments and statements of his career. Clearly the hawks on the FOMC have made a statement and put their foot down on this issue of generating higher inflation to spur nominal spending. Chalk one up for the hawks!