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Monday, February 13, 2006

Bernanke's Howitzer Speech?

Is Bernanke about to give the US Congress a hard line, sock it to me baby, inflation firefighting speech. I certainly hope not, but some seem to expect that this is what he may need to do to keep his credentials in the right place. This is surely a sign that Alan Greenspan's last move may not have been the best one available, maybe at the last meeting a pause may have been a better 'options put'.

Ben Bernanke, appearing before Congress this week for the first time since becoming Federal Reserve chairman Feb. 1, is likely to brush aside lawmakers' calls for a pause in the central bank's credit-tightening campaign and vow vigilance against inflation, analysts say.

Cementing the Fed's inflation-fighting credibility at a time of regime change at the central bank is particularly important because some in the markets are already suspicious that Bernanke will be soft on inflation. Behind those concerns: Bernanke's suggestion in 2002 that the Fed would pull out all stops if needed to fight a deflationary downturn in the economy, a strategy he compared to a ``helicopter drop'' of money.

``He's given his helicopter speech and established his anti- deflation credentials,'' says Tom Gallagher, Washington-based senior managing director at ISI Group, a New York money- management and research firm. ``Now he's got to give his howitzer speech and establish his anti-inflation credibility.''

James Hamilton has a thoughtful and interesting post which explains some of the reasons why Bernanke really needs to be able to be flexible, especially in the light of the oil price risk post by the looming confrontation with Iran (and here).