Shavian monetary policy

27 August 2010 By Martin Hutchinson

The Fed boss said on Friday he would act against deflation but he ignored the federal deficit. Even Japan has not had significant longterm deflation, while the U.S. deficit is at record levels. Bernanke s faulty diagnosis and treatment are unlikely to produce faster growth.

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Speaking at the annual Kansas City Federal Reserve economic symposium in Jackson Hole on Aug. 27, Fed Chairman Ben Bernanke said the U.S. central bank would strongly resist deviations from price stability in the downward direction.

He rejected the option proposed by International Monetary Fund chief economist Olivier Blanchard that central banks should raise their inflation target to around 4 percent. On the U.S. economy, Bernanke said that output growth had slowed to a pace somewhat weaker than the Fed had projected earlier this year. However, he said the preconditions for a pickup in growth in 2011 appear to remain in place. His only reference to deficits was to acknowledge that managing fiscal deficits and debt is a challenge to many countries.

The second estimate of U.S. secondquarter GDP growth was revised downward from an annualized 2.4 percent to 1.6 percent. Final sales growth was revised down from 1.3 percent to 1.0 percent. The price index for gross domestic purchases increased by 0.1 percent; the core price index increased by 0.8 percent.

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