“Just Doing Our Job, Ma’am”

Investor confusion abounds over what's routine and what's truly a worry for the Fed.

Fed Chairman Ben Bernanke gave his semi-annual testimony to Congress this week, subsequently generating a bevy of headlines on what the Fed is "worrying" about these days. Their chief "concern" is inflation.

Inflation Concerns Continued to Dominate Fed June Meeting

By Associated Press via Fox News

At Fed, Inflation is Top Worry, Making Rate Cuts Unlikely

By Greg Ip, The Wall Street Journal (*site requires registration)

The financial press has generally interpreted this as Bernanke-speak for "this is clearly a big potential problem in the offing, and it's a matter of when rampant inflation shows up, and not if."

Of course, no such thing was uttered by Mr. Bernanke. In fact, quite the contrary. The Chairman's comments by and large highlighted a benign inflationary environment, with risks actually diminishing somewhat over the last few months and into the immediate future. Still, analysts and journalists alike seem really fired up about the fact inflation is still "on the Fed's mind." Here's the full testimony, unfettered by analysis:

Testimony of Chairman Ben S. Bernanke's Semiannual Monetary Policy Report to Congress

July 18, 2007

Well…of course inflation is on their minds! It should always be! Just because an issue is on the Fed's radar doesn't mean it's a problem. Bernanke very forcefully reiterated his belief the Fed should maintain its "dual mandate," meaning contained inflation and low unemployment are its chief concerns. So, inflation should always be a Fed inquiry. If it's not, that in itself might be a red flag!

Analysis of the Fed's comments is a consistent source of amusement for us at MarketMinder, and something we've commented upon before. See past commentaries, "When You Get to the Fork in the Road…" (5/9/07) and "Fight the Fed" (2/2/07).

Maybe it's better to think of the Fed as a sort of inflation and employment police. The stout men and women of today's police departments around the country are thinking about crime all the time—even when it's not a rampant problem. That's their job; it's nothing extraordinary. That's why they're famous for saying "Just doing our job, Ma'am," even when they save the day. Crime is always their concern. Just so, there's a titanic difference between the Fed's ongoing inflation monitoring and the onset of a legitimate problem. The Fed is always concerned about inflation because that's the nature of the job.

Major central banks like the Federal Reserve, Bank of England, Bank of Japan, and European Central Bank, are by now all very well developed and experienced at conducting monetary policy. In decades past, central banks often wrestled with poor information, little communication between each other, and inexperience.

Today's central banks enjoy a sturdy infrastructure of information and experience allowing for a stable, predictable system for markets and the economy to navigate. Central banks are able to monitor risk and meaningful market indicators with great alacrity and depth of analysis like never before. This is not to say, however, central banks will never make another mistake. But the systematic risk of major policy errors—too much or too little money creation, for instance—is less today than any time in the past.

We note the 10-year US Treasury bond is back down to about 5% since its sharp rise a few weeks back. Long-term interest rates and credit spreads are at or below levels seen a year ago in some of the world's largest financial markets like the US and Japan. Employment is high and inflation is benign. For more of our thoughts on interest rates, see:

• "Befuddled Bond Bears" (6/27/07)

• "Runaway Rates?" (6/15/07)

• "Yield Mandala" (6/11/07)

While there's plenty of investor confusion on what's a legitimate worry and what's just normal oversight at the Fed, today's positive economic environment and strong stock market ought to serve as explanation enough for the perma-bears. Maybe Ben should end his remarks to Congress simply by tipping his cap and saying, "Just doing our job."

Have a great weekend.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.