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Why Bernanke's Testimony Tells Us Nothing

My colleague John Judis e-mailed yesterday after Ben Bernanke's Hill testimony worried that the Fed chairman was trying to mau-mau the administration into tightening the money spigots prematurely, possibly triggering a 1937-style economic relapse. It was comments like these in particular that had John worried:

[I]n recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes... Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

First, a stipulation: Obviously Bernanke is talking about fiscal policy here, whereas he only controls monetary policy. So it's not like he can bring about the fiscal tightening on his own. On the other hand, he can (also obviously) raise interest rates if he's worried about large deficits triggering inflation, so he can't exactly be ignored.

With that out of the way, I guess I'd say that, like John, I worry that the Fed will tighten credit prematurely to head off expected inflation caused by large deficits. But I'd also argue that we can deduce almost nothing about what Bernanke actually intends to do from his testimony. That is, if you're Ben Bernanke, there's good reason for you to make these comments whether or not you're really anxious about large deficits causing inflation. If you are in fact anxious about it, then you convey your concerns to the administration and hope they change course. And if you're not anxious, it's still worth trying to convince the bond markets that you are. That's because convincing the bond markets that you're worried about large deficits and inflation is one way to make bond traders less worried about inflation, which lowers long-term interest rates and makes your job as Fed chairman much easier.

So I don't think we can infer a ton about what Bernanke really thinks or intends to do from his testimony. He kind of has to say what he said yesterday regardless. True, at some point actions speak louder than words. But we're not really at that point yet, since very few people think we should actually be tightening right now.

--Noam Scheiber