More epic fail from the Fed.

http://www.latimes.com/business/la-f...,3076641.story
Federal Reserve Chairman Ben S. Bernanke, facing tough questions from Republican lawmakers over inflation and the Fed's policies, on Wednesday defended the central bank's efforts to stimulate the economy by pumping more money into the financial system.

At a hearing before the House Budget Committee, Bernanke said he wasn't concerned about the current level or expectations of inflation in the U.S., despite sharply higher oil and food prices that have pinched emerging economies and contributed to the wave of protests in the Middle East.

Bernanke denied that the Fed's loose monetary policies were responsible for rising global inflation. And he expressed confidence that the central bank's actions to spur growth in the U.S. most recently by purchasing billions of dollars of U.S. Treasury bonds were temporary measures that the Fed had the ability to halt or reverse before inflation spiked.

"In a recovery period, you have to pick the right moment to begin taking away the punch bowl," Bernanke said, referring to the famous central bank line about raising interest rates when the economy gathers steam. "We are committed to making sure that we do it at the right time."

Even so, there has been increasing concern voiced recently, including from some Fed policymakers, about the risks of the central bank's latest program to buy $600 billion of Treasury bonds through June, especially given indications that the U.S. economic growth is accelerating. And as in some corners of the financial world, some lawmakers Wednesday responded to Bernanke's assurances with skepticism.

"My fear is, you're going to catch it before the cow is out of the barn, you're going to see inflation before it is already launched," said Rep. Paul D. Ryan (R-Wis.), the new chairman of the House Budget Committee.

Ryan noted, for example, that bond yields in recent days had surged, which is seen as reflecting rising expectation of higher inflation down the road. Bernanke said that those movements indicated investors' stronger confidence in the economic recovery, not worries about inflation, which has been running well below the Fed's target of 2%.

The Fed chief also gave a somewhat more positive assessment of the employment situation, after last Friday's report showing the nation's unemployment rate falling to 9% last month from 9.4% in December and 9.8% in November.

He said: "Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front."

And although consumer spending and the broader economy have gained strength recently, Bernanke said he still expected economic growth to be moderate for awhile and that employers reportedly were remaining reluctant to add to their payrolls. As a result, he said, it would be several years before the unemployment rate returns to a more normal rate, which is commonly seen as about 5%.
There are a couple problems with his statements.

First, anyone who has had to buy gas and go grocery shopping in the past six months knows that prices have not remained flat. They've gone up. Considering how big the Fed's decisions are on world markets, there's reason to believe that the actions of the Fed certainly can impact global markets.

Second, when inflation comes, it doesn't enter as a timid fly that you can step on at any moment. As we saw in the 1980s, the Fed's response was to basically slam on the brakes. At the time, Volcker took a lot of flak for that, although later he would be seen in a better light. If we get inflation here and we're still in a recession, what is Bernanke going to do? I'd rather see us pursue more fiscally responsible measures and allow the market to correct for the massive amounts of malinvestment that took place. Stalling that with temporary quantitative easing or other stimulus will only prolong the situation and make the problems worse.

Third, it is true that the unemployment rate dropped (although job openings dropped at the same time), but when do we take away the punch bowl? Do we do it at 6%? 5%? Do we pull it away at a certain rate of change of people being employed? Or do we pull a Krugman and basically stimulate forever? You've given no details on how you would tackle this problem, which is especially bad when you don't take inflation seriously either.

Finally, the bond market does certainly gauge speculation about interest rates. I'm surprised that the Fed chairman would utter such stupid nonsense. The reason is that the bond price is inverse to the rates. So if people think bonds are a bad investment, the demand will fall, the price will go down, but the yields will go up. This isn't some hidden knowledge, it literally came out of my economics textbook and pretty much every investor website about bonds.

If the Fed thinks they can ignore inflation risks, then they are playing a game that we will all surely lose.