Precious Metals Firm, Bernanke Addresses Inflation, Exit Strategy

Precious metals and the broader financial markets showed a relatively mild response to the latest public commentary by Federal Reserve Chairman Ben Bernanke.

Gold futures – which relinquished a portion of their gains earlier in the day – remained up by $4.80, or 0.3%, at $1,778.70 per ounce.  Silver futures – which had risen to $35.44 per ounce this morning, remained higher by $0.29, or 0.9%, at $34.87 per ounce in early afternoon trading.

In a speech at the Economic Club of Indiana, Bernanke addressed five issues related to the U.S. central bank and monetary policy.  The large majority of the Fed Chairman’s remarks involved topics that he has previously discussed – including the Fed’s objectives, U.S. fiscal policy, and transparency at the central bank, and the risk of longer-term inflation, among others.

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A few noteworthy items from Bernanke’s comments, however, are below:

- While unemployment has been stubbornly high, our economy has enjoyed broad price stability for some time, and we expect inflation to remain low for the foreseeable future. So the case seemed clear to most of my colleagues that we could do more to assist economic growth and the job market without compromising our goal of price stability.

- With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear–which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you “monetizing the debt”–printing money for the government to use–and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates.

- I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. For example, the Fed can tighten policy, even if our balance sheet remains large, by increasing the interest rate we pay banks on reserve balances they deposit at the Fed.

- The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.