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Home > Blogs > Anthony Harrington > The FOMC’s first ever press conference has gold setting new records – part 1

The FOMC’s first ever press conference has gold setting new records – part 1

US inflation | The FOMC’s first ever press conference has gold setting new records – part 1 Anthony Harrington

On April 27th the US Federal Reserve held a historic press conference, its first ever such conference after its regular Federal Open Markets Committee rates and policy meeting. The conference consisted of a fairly short and tidy presentation by Fed Chairman Ben Bernanke, followed by a long and rambling press conference in which sensible and nonsensical questions from the press followed each other in short order.

As an instance of a nonsensical question, Bernanke was asked what the Fed intended to do about the price of oil. That question gave the Fed Chairman the chance to explain that the Fed did not actually command any significant oil reserves, unlike the Saudis, so couldn’t actually impact the price directly, but sympathized greatly all the same with the poor American motorist who could no longer afford to drive a gas guzzling, old technology, US-made vehicle (not exactly his words, but a reasonable summary).

The business of the meeting can be summed up as no rate change, no particular anxiety over inflation and no more Quantitative Easing 2 after its scheduled end in June. At one point during the press Q&A session Bernanke was thanked by a journalist for holding this first ever post-rate-decision thrash, and then asked by the same journalist if he and the Fed were not just the least bit bothered by the idea that some off the cuff answers during the Q&As would send the markets into a tizzy. Not in so many words, of course, but that was the nub of the question.

Bernanke answered that the Fed had indeed pondered this risk long and hard, but had decided that in the interests of greater transparency it was a risk worth taking. His answer completely slid over the fact that the Fed had not developed this huge love of transparency until Congress, peeved at the Fed’s less than competent oversight of the crash and worried about Fed backroom deals with banking buddies through the bailout phase, demanded greater transparency.

Since then, transparency has been very high on the Fed’s list of what makes for a good central bank – right up there along with executing its dual mandate of price stability and full employment. One can wonder if all those calls by various politicians and commentators for the Fed’s abolition might have played some small part in the Fed’s newfound desire to be better understood. But be that as it may, greater transparency, whatever source it springs from, has to be applauded.

Investors clearly tuned in to the conference and made their decisions rather rapidly as Bernanke was speaking. Almost as soon as it became clear that rates would stay untouched investors concluded that the dollar weakness would continue. They also appeared to disagree with the Fed Chairman’s assessment that US inflation, while somewhat uncomfortably above the Fed’s mandated level at present, was a transitory phenomenon that would drop back to the target levels of around 2% relatively soon.

Gold, the traditional hedge against inflation, immediately began climbing, ending that historic day by setting new records above $1500 an ounce. Silver too, shot off like an Olympic sprinter. As Larry Kudlow put it in a piece on, the markets saw that “Mr. Bernanke had no defence of the sinking dollar, or the inflation it brings, or the drop in middle-class living standards it causes – so it is little surprise that gold prices surged $24 to $1,526 during the Fed chairman’s press conference.” Kudlow sums it up thus:

"Mr. Bernanke just doesn’t get that inflation-sensitive market-price indicators – like rising gold, oil and commodity indexes, and the falling dollar exchange rate – are trying to signal higher future inflation. Instead of listening to the markets, he is determined to fight them. This is a losing battle. Instead of a market-price rule (anchored by gold) we have some sort of Bernanke fine-tuning rule. It’s not working.”

The press were, of course, also intensely interested in the Fed chairman’s view of long term unemployment, but we’ll deal with that in part 2.

Further reading on fiscal deficits and US inflation:

Tags: Ben Bernanke , Federal Reserve , FOMC , gold , gold price , inflation , recession , slow growth
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