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Wednesday, April 27th, 2011
parsing expectations

Ben Bernanke’s experiment went off pretty well overall.  While he sounded a bit nervous for much of the time (who wouldn’t be?), he provided the appearance of transparency, while not really saying too much of substance.  I’d say he exceeded expectations.

If anyone was expecting revelations, they didn’t get them.  It was the status quo — and the markets responded in kind while he spoke, by behaving as they generally have for the last several months:  precious metals and stocks up, the dollar and bonds down.

There were a few phrases that will get analyzed to death, but for the most part there wasn’t anything earth-shattering.  I’d say that’s because the questions were pretty soft.  Next time, there should be half journalists and half market mavens.  There would be more questions that mattered.

According to the transcript I saw, Bernanke used the phrase “inflation expectations” thirteen times.  While noting that short-term expectations have been on the rise, he said that, “for the most part I think it’s fair to say that medium-term expectations have not moved very much, and they still indicate confidence that the Fed will ensure that inflation in the medium term will be close to what I called the mandated consistent level.”

Above you see a chart that appeared previously on this site, showing four different maturities of inflation swaps.  These are market-traded instruments, not survey results.  Note the changes since August.  I would think that the five-year swap would come closest to “medium-term.”  At another point in the press conference, the Chairman talked about the need for those medium-term expectations to “remain well-anchored and stable.”

My questions for the Chairman:

What do you mean by “medium-term expectations”?  What are the specific indicators that you think are best?

What is the “mandated consistent level” to which you referred?

Does it make a difference that these are all above the Fed’s inflation target and are back to levels generally seen prior to the financial crisis?

When you reference stability in these kinds of indicators, to what period are you referring?

(Chart:  Bloomberg terminal.)