Bernanke’s Speech: Stability Over the “Medium Term”by Tim Manni
Last week Federal Reserve Chairman Ben Bernanke delivered a key speech on “Reducing Systemic Risk” at the annual Fed conference in Jackson Hole, Wyoming which in part reiterated the hopeful economic outlook consumers have been promised for much of the year.
Despite the Fed’s concerns over inflation, it will continue to leave interest rates unchanged, since expectations are that inflation will ease over the “medium term” (end of this year and into 2009); if not Bernanke said the Fed will be forced to react. Since mid-July, the drop in oil prices, a settling in food costs, and a stronger dollar have controlled inflation to a certain degree, and have spared policy makers from having to raise rates.
Despite the Fed’s hopes that poor economic conditions will self-correct, the central bank’s understanding of their ramifications remains realistic:
“…the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.
In last Friday’s address in Wyoming, Bernanke said the Fed has begun to plan for the future in its goal to reduce and plan for systemic risk:
Although we at the Federal Reserve remain focused on addressing the current risks to economic and financial stability, we have also begun thinking about the lessons for the future. I have discussed today two strategies for reducing systemic risk: strengthening the financial infrastructure, broadly construed, and increasing the systemwide focus of financial regulation and supervision.
Bernanke continued to urge that an expanded supervision for the Fed and the power for the Treasury Department to rescue investment banks will shore up the financial markets and limit systemic risk.