Three key points from Bernanke press conference

Genevieve Signoret

Here’s a quick annotated summary of three key points that I took from Bernanke’s press conference:

1. If Greece were to default, it would probably threaten European political unity and would surely threaten European and global financial stability. U.S. banks have little direct exposure to Greek debt (they don’t hold much of it directly on their books). They do have large indirect exposure by their exposure to core European banks (which in turn hold Greek sovereign debt). Nonetheless, stress tests show that a default would cause only minimal damage to U.S. banks. Much greater damage, not just to banks but to the entire financial system, would arise from the the impact on asset markets. The event would “roil financial markets globally”, he believes. So he stands with the ECB on this issue: we mustn’t let it happen, at least not now. Not that he has any say in the matter.
2. Fiscal cuts are a good idea only if they are focused on the long run. 10 years out. Sudden and sharp fiscal consolidation would not be conducive to job growth. He has said this recently before Congress as well. Of course he’s right.
3. The Fed has legal authority to set an inflation target, a mechanism that he has long been a proponent of. But if the Fed were to choose to adopt this mechanism, it would first seek buy-in from Congress and the executive branch. It would also take great care to communicate to the public that it was not abandoning its other mandate, maxium employment. The two mandates are not in tension: price stability gives the Fed room to maneuver to boost employment in the event of a negative shock. He sounded to me quite keen on the idea.