Bernanke Bombshell

Newly-installed Fed Chief Ben Bernanke gave a speech at Princeton last Friday and, Dr. Ed Yardeni gives his assessment:

(1) The so-called Phillips Curve is dead. There is no tradeoff between unemployment and inflation. Price stability is the best way to achieve low unemployment. (2) Inflation that is high and stable is better than rising and volatile inflation. But the best way for the Fed to maximize the potential growth of the economy is to target very low inflation, a.k.a., "price stability." (3) It is probably more important to contain inflationary expectations than actual inflation. The Fed can manage expectations best by clearly communicating its commitment to price stability. This is why BSB is a big advocate of transparency in the conduct of monetary policy. (4) The latest oil price shock hasn't had much if any impact on core inflation because the public has confidence that the Fed will keep inflation low. "The anchoring of inflation expectations in a narrow range has been the product of Fed policies that have kept actual inflation low in recent years, clear communication of those policies, and an institutional commitment to price stability."

This is an earthquake if this really represents a new view at the Fed. The Fed has been guided by Phillips Curve thinking for years and I even saw Bernanke speak where he mentioned "resource utilization" many times throughout the speech. While I think it would be a good thing to have less Phillips Curve and more Milton Freidman in the Fed's diet, any philosophical shift is going to be hell on the bond market and its commentators. People have gotten so used to Phillips Curve-type analysis that trying on new intellectual duds is going to take some getting used to. There could be fortunes made and lost in the near future, if this speech indeed signals where monetary policy is headed.