Ben Bernanke spoke out on inflation today more than he ever has in his tenure as Fed Chairman. It was very interesting to hear just what is going through the head of the most influential man in the U.S. economic system regarding inflationary pressures. Today Bernanke spoke at Harvard University's Class Day 2008, and quite a bit of headlines came out of the speech.
Bernanke said that the recent rise in inflation expectations is a very significant concern to the Federal Reserve and that the current level of inflation is significantly higher than the Fed would like. He said "mantaining confidence in the Fed's commitment to price stability remains a top priority." While Bernanke certainly seemed much more concerned about inflation than he ever has before, he also went out of his way to say that things are far from a crisis at this point. He said that the current level of 3.5% inflation is too high, but it is a far cry from the double-digit inflation rate of the 70's. Bernanke said that he believes an inflation crisis like the 1970's is unlikely in the current environment given improved policymaking and a much more adaptable American economy.
Bernanke also said that considering the tremendous rise in energy prices he believes the American economy has shown impressive resilience. He said that the silver lining in high energy prices is that it is causing a real movement toward energy-saving technologies.
Some sectors of the market responded quite significantly today to Mr. Bernanke's comments. Most notable was the weakness in energy and basic material stocks. The reason for that weakness is our Fed chief has now come out talking up strength in the dollar more than ever in his tenure and the following day talked up inflationary pressures. Commodities generally do very well while the dollar is weak and rates are on the decline, so this news hasn't been taken well in the commodity area.
Today crude oil traded back below $122 a barrel. ConocoPhillips (NYSE:COP) shares dropped 2.68% in today's trading. Marathon Oil (NYSE:MRO) shares fell by 3.57%. Sunoco (NYSE:SUN) shares plunged 9.07% on heavy volume in today's session.
Basic material stocks were also very weak as the rest of the commodity trades fared no better than oil. Freeport McMoran (NYSE:FCX) lost 2.32% on the session. Goldcorp (NYSE:GG) fell by 2.43% today. Cleveland Cliffs (NYSE:CLF) shares lost 3.68% on heavy volume today.
The past couple days have signaled an interesting change in the language coming from Ben Bernanke. It seems this is the signal that a real and significant policy change is coming and it is towards fighting inflation and propping up the dollar. The very earliest of indications from the commodity markets and the currency markets are that Bernanke's language is working, but how long will that hold up?
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