Bernanke is playing with fire

This may not be a popular belief, but I am one to think that Bernanke is playing with fire. For one, we have comments like this, as reported at Bloomberg.

“We expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens,” Bernanke said today in a speech in Indianapolis. Policy makers’ forecast to hold the main interest rate near zero until at least mid-2015 “doesn’t mean that we expect the economy to be weak through” that year.

It seems, as if, Bernanke cares little about the risk of letting inflation expectations getting out of the bag. More worrisome is if Bernanke does not care if inflation expectations get out on the belief that he and the Fed can control the markets at their whim. These comments also do not take into account what will occur if the Fed is forced into reducing the size of its balance sheet if it is forced into doing so to control inflation expectations. Remember, the NASDAQ crash of 2000 was precipitated, in part, due to the reduction in emergency cash Greenspan floated to cover any Y2k disruptions. If memory serves me, this was on the order of $40 billion. What do you think the effects would be if the Fed reduced its balance sheet by $500 billion? $1 trillion?

Lastly, you have Bernanke's quotes mentioned at the end of the above video, where the Fed chairman acknowledges that savers are being hurt by the low rates, but that a strong economy would help incomes. Maybe what is needed is not economic growth that is juiced by monetary policy, but an economic environment where people and corporations can save and invest using appropriate market signals.