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Bernanke, inflation and the markets

Ben Bernanke

TEXT OF INTERVIEW

SCOTT JAGOW: With just a few words this week, new Fed Chief Ben Bernanke rattled investors around the world. He said the Fed will remain vigilant on inflation. The way the markets have reacted, you'd think he predicted an invasion from Mars. But Bernanke's been sending mixed messages so far, and therein lies the problem, says our economics correspondent Chris Farrell.

CHRIS FARRELL: I think Bernanke has had a problem communicating clearly. He's new, he's being tested and the fact of the matter is, he doesn't have the credibility for the markets to react calmly to what he says. So what it looks like Bernanke has decided to do? He's going to establish his credibility against inflation and that means hiking the benchmark interest rate.

SCOTT JAGOW: Well let's take a step back here. Why are the markets so obsessed with the course of inflation anyway?

CHRIS FARRELL: Inflation is your most important economic number for the financial markets, because it affects your savings, it affects interest rates, rates of investment, the value of the dollar and it really has big implications. As inflation takes off, it increases uncertainty. You don't know what the value of things are going to be in the future. So this is an economic reality that affects all our savings and investment decisions.

SCOTT JAGOW: Well there have been quite a few signs of inflation lately, but you're not really in the inflation worrying camp are you?

CHRIS FARRELL: No, I'm not and there's a couple reasons. You know, one, Bernanke was talking about the core rate of inflation and this is the rate of inflation that the Fed really looks at. The core rate of inflation is you take your consumer index and you strip out energy and food because they're very volatile and you're trying to figure out what's really happening to the overall price level. Core rate of inflation is running at 2.1 percent. The comfort zone for the Fed, and this you know typically what they say, is 1-2 percent. So it's one tenth a percent above the comfort zone. That doesn't sound like a runaway to me.

More important, the Fed is going to do what it has to do to fight inflation to prevent a cumulative increase in inflation. I think what we're going to start worrying about more is not inflation taking off but the economic expansion weakening.

SCOTT JAGOW: So could we be looking at several interest rate hikes this year?

CHRIS FARRELL: I think we could. And I really worry about a dangerous dynamic emerging where the markets are saying 'well you're not quite credible enough' and then the Fed goes 'OK well we have to hike our benchmark interest rate in order to increase our credibility' and then the market's really a little bit unsure. Nevertheless I think it's a very safe forecast, June 29th that benchmark interest rate goes up. And yes I think you're right, we could see some more rate hike increases going forward after that.

SCOTT JAGOW: Alright a very clear, tough stance from you Chris, thanks.

CHRIS FARRELL: (Laughing) But they're never going to let me be Fed chairman.

SCOTT JAGOW: Chris Farrell is the Marketplace Economics Correspondent though. In Los Angeles, I'm Scott Jagow. Thanks for joining us and have a great day.

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