During a scheduled speech at 9:00 EDT at the International Monetary Conference in Barcelona, Federal Reserve Chairman Ben Bernanke issued hawkish commentary and focused on the value of the US dollar, which was somewhat unusual as he has said little regarding the currency even as it hit record lows just over a month ago.
In the speech, Bernanke suggested that further rate cuts would be unnecessary, as “policy seems well positioned to promote moderate growth and price stability over time.” Unsurprisingly, he said that high inflation pressures generally reflected “sharp increases” commodity prices, and while “pass-through” to wage costs and consumer prices were limited, “the continuation of this pattern is not guaranteed and will bear close attention.” However, Bernanke’s pronounced focus on upside inflation risks from continued gains in commodity prices were the most hawkish comments at all. In fact, there is now a fear within the Federal Reserve that the public’s long-term inflation expectations will rise, and “could ultimately become self-confirming.” Just last week, Fed Vice Chairman Donald Kohn expressed similar concerns, and it is becoming clear that the central bank is having difficulty managing these inflation expectations, as record high oil prices prove to be a bit more convincing.
Meanwhile, Bernanke also noted that the Federal Reserve is aware of the negative implications of a weak dollar on inflation and inflation expectations. However, he expressed confidence that the Federal Reserve’s dual mandate to foster maximum sustainable employment and price stability would be a key factor to ensure “that the dollar remains a strong and stable currency.”
The US dollar has surged since the beginning of the speech, as the currency is up 150+ points versus the euro and Swiss franc, and up 100+ points versus the Japanese yen and British pound. Fed fund futures – which were pricing in only a 2 percent chance of a 25bp rate cut in June – are now fully pricing in no change in rates.
For the full text of this speech, click here.