The Fed and Inflation

The Lehmann Letter SM

In prepared remarks today before the House Committee on Financial Services, Chairman Ben Bernanke of the Federal Reserve

(http://www.federalreserve.gov/newsevents/testimony/bernanke20100224a.htm)

said:

“Over the past year, the Federal Reserve has employed a wide array of tools to promote economic recovery and preserve price stability. The target for the federal funds rate has been maintained it a historically low range of 0 to 1/4 percent since December 2008. The FOMC continues to anticipate that economic conditions--including low rates of resource utilization, subdued inflation trends, and stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The last dozen words are key. The Fed intends to keep interest rates low for the foreseeable future. That's good for the stock market and good for the economy. The stock market likes low interest rates because interest-earning investments compete with stocks. The higher the interest rate, the smaller the demand for stocks. And, of course, low interest rates encourage borrowing, spending and therefore the expansion of economic activity.

Clearly the Fed wants to do all it can to assist the recovery. There is no hint that the Fed fears an inflationary upsurge. If it did, the Fed would have broached the possibility of raising interest rates to curb borrowing, spending and inflation. It would not have made that low-interest-rate commitment.


© 2010 Michael B. Lehmann