With little room for the Fed to make a course adjustment safely, Bernanke's balancing-act comments carry even greater weight than usualImagine you're Federal Reserve Chairman Ben Bernanke. Giant mousetraps litter the landscape: $135-a-barrel oil, a rising jobless rate, a vicious credit crisis. People are begging you for help. Yikes! What do you do?
You go to a Boston Fed conference on Cape Cod and give a speech on "Outstanding Issues in the Analysis of Inflation." You express mild optimism about the economic outlook, and you promise that the Fed will "strongly resist" an upward creep in inflation expectations.
That, anyway, is what Bernanke actually did on June 9. And although it was just talk, markets responded powerfully. Traders concluded that the Federal Reserve won't let inflation erode the value of the dollar. That day and the next, the dollar staged its biggest two-day rally against six major currencies since January, 2005, even though the government reported on June 10 that record imports pushed up the U.S. trade deficit in April. Some analysts even predicted a long-term rally in the value of the dollar—a vote of confidence in the strength of the U.S. economy.
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