Bernanke: Here Comes the Inflation!

Editor’s Note: Just a modest uptick in inflation? Oh wait, these guys don’t count the trillions they’ve printed from nothing to bail out their banker buddies as being inflationary. Our bad.

The Fed cut its growth estimate for 2011 to between 3.1 percent and 3.3 percent from a January forecast of 3.4 percent to 3.9 percent.

The Fed also raised its estimate of inflation this year to a range of 2.1 percent to 2.8 percent, taking into account a recent surge in oil prices. However, it bumped its core inflation forecasts only marginally to a 1.3 percent to 1.6 percent range.

As for unemployment, it lowered its forecast but said it would stay elevated over its three-year forecast period. For 2011, the Fed said it expects the unemployment rate to land in a 8.4-8.7 percent range, better than a range of 8.8-9.0 percent forecast in January.

“The markdown of growth in 2011, in particular, reflects the somewhat slower than anticipated pace of growth in the first quarter,” Bernanke said in prepared remarks before he took reporter questions.

But he added: “I would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory.”

Bernanke faced broad questioning, including on the falling value of the dollar for which the Fed is getting some blame because of its efforts to broaden credit availability. In the currency markets Wednesday, the U.S. dollar fell to a fresh 3-year low against major currencies while Bernanke spoke.

While deferring to currency policy as an issue for the Treasury Department, Bernanke said a strong, stable dollar was in the interests of the United States and the world economy. He said a growing economy would be helpful for the dollar.

Bernanke also said the first step in tightening interest-rate policy could occur when the Fed stops reinvesting the proceeds of its bond holdings.

Bernanke would not be specific about when that might occur. He said it will depend on inflation and economic growth, adding that step would be a relatively modest one. But it would constitute the Fed’s first tightening because it would allow interest rates to creep up.

Wednesday’s event marks the first regularly scheduled news conference by a Fed chairman in the central bank’s 97-year history.

U.S. stocks extended gains as Bernanke spoke, probably because “there’s no curve ball,” Jeremy Zirin, chief U.S. equity strategist at UBS Wealth Management, told CNBC.

“This is brand new territory,” Zirin said, adding he believed Bernanke “has done a very, very good job of explaining in layman’s terms the process the Fed goes through in establishing policy. To some degree, they are giving Bernanke a thumbs up.”

Mohamed El-Erian, co-chief investment officer at PIMCO, also gave the Fed chairman a nod for his handling of the event.

“After what seemed as a tentative start, he gained momentum and hit his stride very well and effectively,” El-Erian told Reuters. “He addressed a good mix of questions, combining economic and policy issues as well as domestic and international ones.”

In an earlier post-meeting statement, the Fed modestly upgraded its assessment of the jobs market, say it was “improving gradually.” A month ago it said simply that it appeared to be improving.

Importantly, it again expressed confidence that a surge in the cost of oil and other commodities would be transitory and not spark broader inflation.

“Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued,” it said.

The statement marked the conclusion — at least for now — of the massive expansion of the Fed’s balance sheet that helped pull the economy out of its deep recession.

“On policy, the statement confirms that (the bond buying) is over but otherwise leaves everything on the table subject to regular review ‘in light of incoming information,’” said Stephen Stanley, chief economist at Pierpont Securities.

Still, the central bank said it would continue to reinvest proceeds from maturing securities it holds to keep its economic support in place, ensuring it would remain a big buyer in debt markets.

Some investors, such as Bill Gross from PIMCO, the world’s biggest bond fund manager, have predicted a bond market sell-off when the Fed steps out of the picture.

Read more at Andy Sutton’s Extemporania