Bernanke Hints Awful US Situation. Lifting Inflation Goals?

Ben Bernanke talks about adding more stimulus steps if necessary, and mentions a surprising option of lifting inflation goals to boost the economy. While he said this step doesn’t have support in the FOMC, the fact that he even mentioned it is a big surprise. This is his subtle way of saying that the situation is dire and that drastic massive dollar printing steps are considered. More trouble in the US means a global slowdown. The fear triggered by his speech sends the dollar higher. EUR/USD fell 50 about pips to 1.2675 and then slightly recovered. Analysis of Bernanke’s speech:

As Bernanke’s words always have some mystery in them, it’ll take time until the market fully digests the meaning of his words. There are more factors to weigh in:

On the other hand, Bernanke did talk about good growth in 2011 and onwards. This is currently dismissed by the markets, but it sure serves as a serious balance to the hint about further stimulus if necessary.

In his speech, he said the central bank still has many tools. In the past he talked about three tools, and he repeated them again now. He also introduced a fourth tool:

A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC. Conceivably, such a step might make sense in a situation in which a prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations. Also, in such a situation, higher inflation for a time, by compensating for the prior period of deflation, could help return the price level to what was expected by people who signed long-term contracts, such as debt contracts, before the deflation began.

Yet again, in order to balance this surprising option of lifting inflation, a surprise indeed, Bernanke immediately said that this isn’t necessary and that there’s no support for such a move in the FOMC.

But he did mention it. What is the meaning of lifting inflation goals? How can the bank lift inflation – with much more quantitative easing – much more dollar printing. Is the situation so bad? Probably not yet, but mentioning this option sure is a surprise.

The last two hours of Friday’s London session are always messy, as many traders hurry to close positions before the weekend.

In addition, the market is still digesting the GDP downgrade that the US received earlier today. The second release for the second quarter showed a downside revision of the GDP from 2.4% to 1.6% (annualized). This was marginally better than expected. At first, the dollar gained against the Euro, but then these gains were erased, as the tension was mounting towards Bernanke’s words.