Bernanke’s 2011 Jackson Hole migration

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I regard Bernanke’s 2011 Jackson Hole speech as a striking out for the Chairman. I think that Bernanke is trying to migrate from the ‘dovish’ flank, to the ‘balanced’ centre — where he may have been all along…

Since 2002, when Bernanke made his now-infamous helicopter speech, he has been characterised as soft on inflation, or ‘dovish’.  I think this is a mistake, and I think that it is this mistake Bernanke is trying to correct.

In both the aftermath of the tech bubble and the aftermath of the housing bubble, the key policy problem was too low inflation. In both cases, Bernanke forcefully argued that the very high cost of deflation justified taking some risks to make sure it didn’t happen.

By contrast, when Bernanke took over running the Fed in Feb 2006, inflation was too high, and Bernanke (miss-)spent a good portion of his first years trying to persuade the FOMC to adopt an explicit (2%) inflation target. This was resisted by the true doves, as they worried it would conflict with the full employment goal.

What we ended up with were the ‘long run projections’ that now are attached to each quarterly forecast.  I think that these are a very useful addition to central bank openness – for example, they allow us to see the committee’s estimate of the NAIRU – and they go much of the way toward a formal inflation target.

Bernanke holds the strong view that in the long run, monetary policy sets only the price level; and that the best thing monetary policy can do is to keep the price level fairly constant.

In the 2011 Jackson Hole Speech, Bernanke noted that:

The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability.

By choosing this topic, and making this statement,  Bernanke seems to be subordinating all the central bank’s actions to their inflation control objective.

So what is the FOMC’s inflation outlook?

With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.

The recent pace of inflation has been around target – this is why there was no talk of further easing at from Bernanke.  Additional measures to boost the economy, including further QE, require a change of that assessment. Specifically, they would require an assessment that the risk of a  sustained period of below target inflation had increased.

If I am right, Bernanke’s 2011 Jackson Hole speech is about the limits to monetary policy — in the long run, the only thing monetary policy can do is set the price level.

It is this reality that sets the limits for short run macro-economic stabilisation policy – and it is this awkward fact that presently prevents the Fed from providing additional monetary stimulus over (and above their public ‘solution’ of the Taylor Rule for those that can’t download and update the spreadsheet from the SF Fed website) despite the fact that the recovery has been disappointing.

If it gets bad enough, of course there will be more support – but I can’t see inflation falling quickly enough for that to occur this year.


  1. Inflation is not a problem. the most optimistic scenario has the output gap closing in 2017 but more likely in 2021!

    fiscal policy is needed in a liquidity trap as the US is in now

    1. I have no doubt about bernanke’s ability to expand the money supply and thereby create some sort of inflation — but what sort will it be? I suspect that QE2 created quite a bit of bad inflation, and only a moderate amount of good inflation. The reason being that the demand for credit is so weak in the USA etc. As a result most of the extra money went outside the USA which ultimately had the largest short run impact on the US via increased commodity prices.

      I feel that the ‘inflation tax’ is a big part of why H1 was so weak.

      Sent from my iPad

      1. I understand your argument – the “balance sheet repair” story is appears sensible to some extent. However, your argument seems to disaggregate things a bit too much. The US still remains by far and away the largest economy in the world. If US inflationary expectations grew a bit, then it seems more likely that US producers would factor that into their purchase costs (in terms of securing Q demanded). Hence some of rise in commodity prices would be reflective of higher inflationary expectations in US.

        1. hmm, not sure i communicated what i meant then – the central bank only has one tool: the price / quantity of reserves (some say they can be separated into two tools, and that this is what QE with IOER is but that’s another story). what happens when they shift that stick depends on the structure of demand for reserves – which is of course a product of banking regulations, and the pattern of demand for credit.

          what i am arguing is that because they are close to a liquidity trap, that the stimulatory bit is via the impact on the RoW, and on the US via FX and the export channel. the downside of this is that the USD pegs mean that the EM markets were over-stimulated, and they pushed up the price of stuff the US competes with them to import.

          what bernanke needs is US wage inflation. your mate sumner would agree with that, i’m sure.

          thus far the increase in commodity price inflation largely merely resulted in real consumption wage losses, and therefore slower real GDP growth.

  2. Yes Manny C Japan and the US are outstanding examples of central banks creating inflation!!

    the US needs some fiscal stimulation which as yet it really hasn’t had.

    Perhaps Bernacke the Central Banker needs to learn fron Bernacke the academic>

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