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August 25th, 2008

Bernanke’s Speech: Stability Over the “Medium Term”

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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.

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2 Responses to “Bernanke’s Speech: Stability Over the “Medium Term””

  1. Rebecca Wilder Says: August 25th, 2008 at 2:47 pm

    Hi Tim,

    Thanks for the recap. Did you hear about the controversy between Alan Blinder and Willem Buiter in Wyoming? Dr. Buiter tries to chastise the Fed, while Dr. Blinder stops him in his tracks.

    Here is the ref: http://blogs.wsj.com/economics/2008/08/23/a-misguided-federal-reserve-or-one-that-saved-the-day/

    Thanks, Rebecca

  2. Tim Manni Says: August 26th, 2008 at 11:51 am

    Rebecca,

    Haha wow, yea didn’t seem like the right instance to chastise the Fed — being their annual meeting and all. The blog made it seem like it was a tense couple of moments there in Wyoming. Economics and politics seem to be very similar, everyone has different opinions on policy and the way things should be handled. I guess they’ve alway gone hand in hand. Very interesting though, thanks.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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