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Quick thoughts on Bernanke's speech



First, I like the way the market is reacting: higher bond yields, stronger equities, and a slight rise in inflation expectations. That's good, because higher bond yields and a stronger economy go hand in hand. If the economy grows by some reasonable amount, then we should expect to see lots more of this—much higher bond yields and a much stronger equity market.

Second, it's a shame that Bernanke could not muster the courage to blame profligate fiscal policy for the sluggish economy. At least he refrained from suggesting we need more spending.

Third, it's good that he is drawing a line in the sand on inflation. He will do anything to avoid deflation, but he won't even entertain the notion of trying actively (by raising the Fed's inflation target) to get inflation to rise. He wants strongly to maintain some semblance of price stability. That is reassuring to the markets. Building confidence in relative price stability is essential to help the economy recover. The market needs to know that Bernanke won't squander what the Fed has worked so hard to achieve since the inflationary 1970s.

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