Reactions to the Bernanke Q&A

Ben Bernanke spoke at the National Press Club yesterday (speech here) and he took the unusual step of answering questions afterwards. Here are some excerpts of unusual interest:

Q: What's the connection between QE and higher stock prices?


Bernanke: Monetary policy also works through asset prices (which are guided by lower interest rates). So yes, there is a connection. But there's a virtuous circle of asset prices stimulating economic activity, which then also improves the markets.

Did he just say that? Is the Fed targeting stock prices?!?


QE3, here we come
Here is a key question about QE3:

Q: Will there be a QE3?


Bernanke: In the end, we'll just ask the same questions. Where's the economy going, and what do various inflation indicator look like? We'll ask those questions. If unemployment is still too low, then we may continue. If we're moving towards full employment, then we won't need to stimulate more.

But during his speech he said that job creation remains very weak (emphasis added):

While indicators of spending and production have, on balance, been encouraging, the job market has improved only slowly. Following the loss of about 8-1/2 million jobs in 2008 and 2009, private-sector employment showed gains in 2010. However, these gains were barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly reduce the overall unemployment rate. Recent data do provide some grounds for optimism on the employment front; for example, initial claims for unemployment insurance have generally been trending down, and indicators of job openings and firms' hiring plans have improved. Even so, with output growth likely to be moderate for awhile and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low...

There you have it. Bernanke answered his own question. Inflation remains quite low and job creation is weak. In other words, get ready for QE3.

On the other hand, John Taylor wrote in December 2010 that the markets were signaling tightening in 2H 2011. Who is right?