South-Western College Publishing - Economics  
Bernanke Comfortable With Interest Rates
Topic Monetary Policy
Key Words Monetary Policy, Interest Rates, and Economic Growth
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Reference ID: A159308201

News Story In Ben S. Bernanke's second Congressional appearance since the Democrats assumed majority control in both the House and the Senate, he had a good report card on the economy. The "central tendency" among the Federal Reserve's forecasts is that the economy will grow by 2.5 to 3 percent in 2007; that unemployment will follow current trends and remain low at around 4/75 percent; and the core inflation rate¾which excludes food and energy prices¾will hover just above 2 percent.

After one year on the job, Mr. Bernanke made it clear that the Fed's current policy posture is to have more concern with high inflation than with slow growth. He did indicate, however, that he was fairly optimistic that inflationary pressures were receding.

"Inflation pressures appear to have abated somewhat," Mr. Bernanke told the Senate banking committee, as he delivered the Fed's semiannual outlook on the economy and monetary policy. "A waning of the temporary factors that boosted inflation in recent years will probably help foster a continued edging down of core inflation," he continued. Those temporary factors were energy prices and the slowing growth in the housing market.

With the core inflation rate hovering around the two percent mark, the actual path of monetary policy remains in doubt. The Fed considers a range of 1 to 2 percent in the core inflation measure to be acceptable. When it gets above the 2 percent level they are likely to engage in monetary policy that will increase interest rates.

This current Fed forecast, which is an average of forecasts by Fed governors and the Fed's district banks, is portraying a "Goldilocks" economy that is neither too hot (with inflation) nor too cold (with rising unemployment).

Discussion Questions:
1. Discuss the notion of what economist call the "Goldilocks" economy.
2. Visit the Web site of the Federal Reserve Bank of San Francisco to determine the official goal of the Fed as it relates to monetary policy.
Multiple Choice/True False Questions:
1. The core rate of inflation excludes energy and food prices.
  1. True
  2. False
2. The Fed does not worry about inflation as long as it does not exceed 4 percent on an annual basis. .
  1. True
  2. False
Source Edmund Andrews, "Fed Chief Says Outlook Is Positive," The New York Times Online, February 15, 2007.
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