Federal Reserve Chairman Ben Bernanke delivered a speech this morning at the Economic Club of New York. His remarks included some commentary on the value of the US Dollar. He said that, "we are attentive to the implications of changes in the value of the Dollar...[we will continue] to monitor those developments closely."
An Associated Press dispatch noted that:
Bernanke engaged in a delicate dance. He made clear that Fed policymakers will keep rates at super-low levels. Yet through his words, Mr. Bernanke is also trying to bolster confidence in the dollar without actually raising rates, a move that could short-circuit the fragile recovery. Economists say a free-fall in the value of the dollar is remote but cannot be entirely dismissed. Although low interest rates can put additional downward pressure on the dollar, they are needed to encourage American consumers and businesses to spend more and fuel the economic turnaround.
"Delicate dance" seems to accurately capture the Fed's dilemma, which we have noted is a battle between deflationary forces in the real economy and inflationary forces. Bernanke and other central bankers globally have taken the age-old tack to flight deflation -- pumping massive amounts of liquidity into the financial system. That liquidity, however, can create asset inflation -- dangerous levels.
Bernanke said today that he expects inflation to be "subdued for some time..." But is that a comment about the real economy (such as capacity utilization) or about commodities (such as the price of oil)?
The Dollar today? It's down some.
