Bernanke press conference: a less-reserved Federal Reserve

Two of Washington’s white-marbled institutions – the Supreme Court and the Federal Reserve – are also the most shrouded with a mystique about their inner deliberations. Of the two, the Fed took the lead today and threw open its windows by a good measure.

Fed chairman Ben Bernanke held the first of what is promised to be regular briefings to the press. His answers to reporters’ questions were as nuanced and jargon-laden as can be expected from a central banker whose hand is on the tiller of an economy still in rough seas. A slip of the tongue by one so powerful is able to make markets swoon or swagger. He did not slip in this press conference.

The Fed’s new openness is a necessary step if Americans are to participate in one of the most difficult decisions facing the United States – whether the Fed should use its monetary might to create jobs or to curb budding inflation (see in gasoline and food prices).

Ever since it was created in 1913, the largely independent bank has opted for secrecy over sunshine. Just two decades ago, it didn’t even reveal its decisions to raise or lower interest rates. But today’s more financially savvy public can’t be left in the dark. The unemployment rate is stuck at more than 8 percent while consumer prices are rising – faster than Mr. Bernanke expected.

Solving both problems at once is a delicate task for any central bank. Choices must be made.

Bernanke may be tempted to allow inflation to grow because it diminishes the value of the debt owed by the government. Today’s red ink would not look so bad in tomorrow’s inflated dollars. Many in Congress, too, would love devalued dollars to help solve the deficit crisis.

What’s more, the poor and middle class who are stuck with high credit-card bills or other loans could, in theory, have to pay less.

Ironically, the Fed helped stoke the current inflation by pumping $600 billion into financial markets since November. It had hoped private investors would use it mainly to create jobs. With interest rates at near zero, the Fed could only rain more dollars on the economy.

The markets, however, don’t have much faith that the Fed can effectively reel in the money – the so-called “exit strategy” – it has thrown at Wall Street since the 2008 crisis.

Much of the new money, the $600 billion, instead went to buy real assets such as oil, grain, and gold – as a hedge against inflation – only to boost inflation. The Bureau of Labor Statistics reports a 60 percent increase in inflation during the first three months of 2011.

A similar mistake was made in 2003-2004 when the Fed loosened the credit reins and helped create a housing bubble – whose bursting made Wall Street go nearly bust.

The Fed seems to have faith that inflation won’t get out of hand because workers aren’t in any mood to demand higher wages. Many are happy just to have a job. Bernanke may also believe the 50 percent rise in oil prices over the past six months is only temporary, much like previous oil spikes.

Workers, however, won’t put up with $4-a-gallon gasoline and higher grocery bills for long without seeking higher pay – expectations of inflation alone can cause real inflation. And many economists expect big emerging economies like China will keep oil prices high for a long time.

The current inflation in energy and food may soon raise the “core” inflation rate to a level that could erode the savings of most Americans. And getting rid of high inflation – by raising interest rates and slowing the economy – is a lot more difficult and painful than creating jobs.

The Fed hopes its new transparency may help restore some of its lost credibility – and also dampen inflation expectations. In 2009, only a third of Americans said in a poll that the Fed was doing a good or excellent job. The public needs better signals on the Fed’s internal debate about inflation. Many of its board members are speaking out more in dissent of Bernanke’s moves.

The Fed’s aura of secrecy has thankfully diminished in recent years. Today’s press conference – which will be repeated every three months – is a big move to provide more clues to its reasoning.