By tradition the Federal Reserve Board has always been a secretive body. Until yesterday. The chairman of the nation’s central bank held a news conference – the first in the Fed’s 98-year history. Chairman Ben Bernanke explained what the Fed has been doing to spur economic growth while keeping inflation in check. Some critics want the Fed to be less careful about inflation and more active in stimulating the economy to promote job creation. We’ll talk about Bernanke’s message in front of the cameras and what observers gleaned about the outlook for the U.S. economy and unemployment.


  • Martin Baily Senior fellow in economic studies at the Brookings Institution; former chair of the Council of Economic Advisers during the Clinton administration (1999-2001).
  • Binyamin Appelbaum Reporter, The New York Times.
  • Peter Morici Professor of International Business at the University of Maryland, former director of economics at the U.S. International Trade Commission.


  • 10:06:54

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Yesterday marked the first time a chairman of the Federal Reserve has ever held a scheduled news conference -- that, in and of itself, made news. We talk about what Chairman Ben Bernanke had to say and what's ahead for the U.S. economy. Joining me in the studio, Martin Baily of the Brookings Institution, Binyamin Appelbaum of The New York Times and Peter Morici of the University of Maryland. We do look forward to hearing your questions and comments. Join us on 800-433-8850. Send us your email to Feel free to join us on Facebook or Twitter. Good morning, gentlemen.

  • 10:07:59


  • 10:08:00

    MR. MARTIN BAILYGood morning.

  • 10:08:01

    REHMMartin Baily, if I could start with you, why do you believe the Fed decided to hold a news conference now?

  • 10:08:11

    BAILYWell, I do take Ben at face value, that he has had a long-term belief that he wants the Fed to be more transparent, to give more information to make sure that the general public and the markets understand what they're doing. So I do think this is part of a progression that he's followed during the time he's been Fed chairman. Why did he do it now? Well, the Feds had a pretty rough patch for the last few years. I think they probably did many of the right things to deal with this financial crisis and the recession. But they're getting a lot of criticism for what they did. So he's taking a lot of heat in Congress, a lot of heat among the general population, so I think he's looking for an opportunity to speak out.

  • 10:08:56

    BAILYNow, why does he do it now? The economy is sputtering along. It's not doing very well. He's gotten some criticism on the press, saying, on the one hand, he's about to generate massive inflation, on the other hand, we still have too much unemployment. And so, I think, he -- again, this is a good moment for him to explain what they're doing and how he sees those two problems and the tradeoff between those two.

  • 10:09:23

    REHMNow, to, you, Binyamin Appelbaum, the question of whether this means that he sets a precedent and goes forward -- going forward, will other Fed chairs decide that now is the time to begin this process and keep it going?

  • 10:09:52

    APPELBAUMIt's always hard to predict the future, but it's difficult to believe that you could put this genie back in the bottle. Once the Fed chairman has, you know, gone out there and done this, I don't know how a subsequent Fed chairman would explain that he no longer felt like explaining himself to the public. So my guess is that this is done by pretty much every other developed economy. The central bankers in Europe and Japan hold these types of press conferences. Their economic systems have not collapsed as a consequence. My guess is that this is here to stay.

  • 10:10:21

    REHMAnd I realize you were there at the news conference.

  • 10:10:24


  • 10:10:24

    REHMTell us what he had to say and how you interpreted it.

  • 10:10:30

    APPELBAUMYou know, it was kind of a seminar by an economics professor. Chairman Bernanke, obviously, has that background. He was a professor at Princeton for many years. And this seemed to be an opportunity for him to lecture and to explain how the Fed works, how the economy works. And, really, his core point is that the Fed is doing everything it can to improve the economy and to reduce unemployment with the caveat that it needs to make sure inflation does not start to rise again. And that is now increasingly a limiting factor on its ability to stimulate growth. So he talked a lot about that balance.

  • 10:11:05

    REHMHow successful do you think he -- or successfully he came across?

  • 10:11:12

    APPELBAUMHe's a very lucid, clear speaker. He's very good at explaining complicated issues. You know, he stays calm. He doesn't sort of wander into the politics of things. I find him very effective as a speaker.

  • 10:11:24

    REHMPeter Morici, how effective did you find not only Ben Bernanke, but the message he offered?

  • 10:11:34

    PROF. PETER MORICIWell, the message he offered was really a reiteration of what was in the policy statement. There wasn't much a variation from it, other than some comments that he's made in the past about deficits and things of this nature. It's really not as novel as people make out. Although in other countries they have press conferences, we have -- every six weeks, he goes up on the Hill and testifies. And he, frankly, gets grilled a little bit more than he was yesterday...

  • 10:11:56


  • 10:11:57 congressmen and senators.

  • 10:11:58


  • 10:11:58

    MORICIYeah, I covered the event for CNN International and sat through it and commented before and after and all that. And it kind of reminded me, when I was in graduate school, not just of a professor having a seminar, but when a distinguished professor from another university was coming and all the graduate students were told you can ask questions, but be polite and don't step on his toes.

  • 10:12:18

    REHMAnd you felt the reporters were that one.

  • 10:12:20

    MORICIExactly. I was -- it was remarkable. Having been interviewed by some of these guys, their restraint was remarkable.

  • 10:12:28


  • 10:12:29

    APPELBAUMYou know, I think that that's true. And, I'll tell you, my feeling is that one of the best consequences of this decision to hold press conferences is that it is going to force the press to be more forceful in its questioning of the Fed. There's long been this sort of special, respectful relationship between the small group of reporters that covers the Fed and the Fed governors. By bringing that interaction out into the public domain, it's going to create a lot of peer pressure, frankly, and a lot of public pressure for reporters to be more confrontational, to press the chairman on these issues. And I think you'll see that evolve at subsequent press conferences.

  • 10:13:02

    REHMAnd I would think even more knowledgeable about the kinds of questions that are post.

  • 10:13:11

    APPELBAUMPerhaps, although I suspect we'll also see the chairman getting better at avoiding providing clear answers, which is what most Washington bureaucrats do so well.

  • 10:13:18

    REHMMartin Baily, how did the markets react to whatever Mr. Bernanke had to say?

  • 10:13:25

    BAILYWell, the market did pretty well yesterday. And I noticed it was about flat this morning, at least when I last checked it, despite a relatively weak growth rate from GDP. So, I think, in general, they've reacted positively, but there was not a lot of news as, I think, we've heard in the things that he said. So I don't think there was a big reaction from markets. I might mention also, by the way, that in terms of confrontation, I know that some of the reporters in their writings have been much more critical. David Leonhardt, one of Benjamin's colleagues, was very critical of Bernanke because he wasn't doing more to stimulate the economy. So I think there is some criticism out there. It probably was restrained in the context of the press conference.

  • 10:14:10


  • 10:14:11

    MORICIYeah, while the press conference was going on, the Dow was up a certain amount. And then, in the period afterwards, it took a nice jump. I mean, it finished the day very strong. I think it was pleased by what it heard, though I don't know that the impact would have been much larger or much smaller than if he had just issued his statement because the notion that, you know, interest rates were going to stay low for an extended period of time is exactly what the market wants to hear right now.

  • 10:14:34

    REHMYeah, it...

  • 10:14:35

    MORICIThere were no real surprises.

  • 10:14:37

    REHMIt's really interesting to note that would it have been different, had it simply been a statement issue, Binyamin.

  • 10:14:47

    APPELBAUMYou know, I don't think there's any way to know that. And I think it's always very hard to say what has moved the market on a given day.

  • 10:14:53


  • 10:14:54

    APPELBAUMBut, you know, I do think that this had value in terms of helping people to understand a little bit better how the Fed is making these decisions, how it's trying to balance its concern about inflation with its desire to stimulate growth. I thought Chairman Bernanke put a much finer point on that than he has in any previous context, and I thought that that was helpful.

  • 10:15:13


  • 10:15:14

    MORICIYou know, Federal Reserve chairmen are like baseball players. You know, they say a baseball players hits inside a lineup. If you become a Yankee, your batting average goes up by 30 points 'cause you're surrounded by other great batters. This chairman comes in a difficult time and federal policy, whether it was, you know, the Republicans or the Democrats -- this is not really a partisan issue -- has not been very good. We have very large deficits, which constrain his conduct and behavior.

  • 10:15:43

    MORICIAnd the way the government has spent the money has not been as stimulative as it could have been and -- has it has been in other times. On top of that, we have a very large trade deficit because of exchange rate issues with China. That very much constrains his behavior. He's alluded to that at other times, not that it constrains his behavior because -- but the impacts on growth. So the facility of -- or the effectiveness of monetary policy, its potential, is limited by the deficit and -- the two deficits, the budget deficit and the trade deficit. And I think that his conduct and his performance need to be seen in that context. But at some point, if these press conferences are going to be effective, he has to be drawn out on that so he can better comment and explain exactly the context in which he's operating.

  • 10:16:31

    REHMDo you think he was perhaps more optimistic than he should've been, Martin Baily?

  • 10:16:39

    BAILYNo. I thought he was about right. I think I'm probably a little bit more optimistic than Peter is...

  • 10:16:43

    MORICIMm hmm.

  • 10:16:44

    BAILY...about the continuing recovery. We, unfortunately, are not having a strong recovery. There's no question about that. We're looking at the growth rate around three, hopefully, whereas coming out of a deep recession, we might have hoped for much stronger growth rates than that. I do think that he is limited as to what he can do, so I agree with Peter on that. You know, it's -- I don't think there's a whole lot more he can actually do. He's got interest rates down as far as they can go. He's done QE1, QE2, which is these quantitative easing things, so he's done -- he's used the mechanisms that he has to stimulate the economy. We're just facing a lot of head winds, particularly still in the housing market.

  • 10:17:27

    APPELBAUMI don't think that's quite right. Chairman Bernanke has explained at times other things that he could do to stimulate the economy. There is -- you know, there are a number of items in the toolbox that haven't been pulled out yet.

  • 10:17:37

    REHMSuch as?

  • 10:17:38

    APPELBAUMHe could continue to purchase bonds. He could purchase a wider range of bonds focusing not just on treasuries but, as he did two years ago, on mortgage bonds and other kinds of borrowing.

  • 10:17:47

    REHMBut he's saying this purchase of bonds is coming to an end.

  • 10:17:51

    APPELBAUMRight. What he said yesterday, which was very striking, is that he does not believe that the Fed can continue to do those kinds of things without risking inflation, that we've now sort of bumped up against that limit. And, in his view, restraining inflation is more important than taking all available measures to reduce unemployment.

  • 10:18:10

    REHMAnd that's where you disagree, Peter.

  • 10:18:12

    MORICIWell, I think that there are things that he could do rhetorically. For example, he's widely criticized for driving down the dollar. While it is true the dollar has fallen against the number of currencies, it hasn't fallen anywhere near where it should against the Chinese yuan, which is a big problem in terms of the monetary policy that they pursue, and that if he would articulate that, it would take some of the pressure off of him with regard to quantitative easing.

  • 10:18:34

    REHMPeter Morici, he's professor of international business at the University of Maryland. Short break and right back.

  • 10:20:03

    REHMAnd welcome back. We're talking about Fed Chairman Ben Bernanke's statements before a live news conference yesterday. The feeling seems to be that, thus far, he has not been pushed, probed, pulled quite as far as, perhaps, a lot of people would like to see. Here in the studio, Martin Baily. He's at the Brookings Institution. He's former chair of the Council of Economic Advisers during the Clinton administration. Binyamin Appelbaum, he's a reporter for The New York Times. Peter Morici of the University of Maryland, former director of economics at the U.S. International Trade Commission. We are going to open the phones shortly. So do join us, 800-433-8850.

  • 10:21:06

    REHMHere's a comment posted to the drshow website. "Please ask Prof. Morici if he believes Bernanke's comments about inflation. The cracked barrel of oil is racing through this economy, increasing the prices of everything. At least 10 percent increases in apparel are coming. My view is that his comments are not believable about inflation."

  • 10:21:44

    MORICIWell, let me say that I believe that Ben is saying what he believes, and so he's telling the truth in that sense. I believe, like economists, we can disagree, and I think that he is overly optimistic about growth for the rest of the year. It will be lower than he expects, and inflation will be higher. In the first quarter, we haven't seen the full effects of these higher gas prices. And I think too much has been attributed to vague notions and accusations about speculation. The fundamentals offer higher oil prices because of growth in China and elsewhere.

  • 10:22:15

    MORICISo I think that he was overly optimistic yesterday in indicating that inflation for, you know, this year, the central tendency would be somewhere between 1.3 and 1.6 percent and that growth would be around 3.2. I think that those were not the best forecast, but Martin has a very different view.

  • 10:22:31

    REHMMartin Baily.

  • 10:22:32

    BAILYI do think he's about right on growth, although growth is very hard to predict, so we'll have to see how that goes. On inflation, I think one of the main points that he's making is that the inflation we're getting is from food and oil. And the cause of that inflation is not monetary policy or what he did on QE2, the expansion of the supply of money. It's really a global phenomenon of food prices and oil prices, particularly oil prices through the gradual recovery, the advanced economies and the growth in China and other emerging markets.

  • 10:23:07

    BAILYAnd that's pushed up the price of oil -- it may push it up further -- and that is hurting us in terms of living standards and, overall, the sort of headline rate of consumer price inflation. But if you extract from the effect of oil, underlying inflation, what's happening in wages, what's happening in mock-ups, I don't think you see a lot of inflation.

  • 10:23:28

    REHMBut the question becomes what could the Fed do about that inflation in oil prices and food prices?

  • 10:23:38

    BAILYAnd I don't think it can do anything. As Ben said, he doesn't have any oil in his back pocket. He can't produce any more oil, so that's not going to work -- similarly for food. The other point that I would agree with is that those prices go up, and then they come down again. And so once those prices either come down or stabilize, then the inflationary impetus will gradually abate.

  • 10:24:03


  • 10:24:04

    APPELBAUMIt's important to understand the Fed's argument, which is basically that prices are rising, sure. But inflation means that the cost of everything is rising, including the cost of workers -- that is, that they're getting paid more, and therefore that they can pay these higher prices. If wages don't rise, what happens is that people start buying less oil. They start purchasing fewer commodities, and that diminished demand ends up dragging down prices. So, you know, what you basically have is an argument about whether these price increases are going to be sustained across the entire economy, in which case the Fed could do something.

  • 10:24:36

    APPELBAUMIt could start to tighten monetary policy. It could start to raise interest rates, make money more expensive. Chairman Bernanke says he doesn't want to do that because he thinks the economy needs to be stimulated. And, moreover, he doesn't see evidence that these price increases will be broad-based for the very simple basic reason that we still have huge unemployment, huge slack in the labor force. There's no evidence that people are going to be paid more money anytime soon. And until they're paid more money, in his view, they're not going to be able to pay higher prices.

  • 10:25:07


  • 10:25:08

    MORICIWell, demand has been slacking back the last couple of months, and gasoline prices aren't coming down. And the reason is the United States is not that large a part of the equation anymore when it comes to global energy prices. It's what's going on in China. Now, from the point of view of the domestic levers of monetary policy, there's not much he can do. Tightening down on the economy won't do much to affect global gasoline prices or oil prices. On the other hand, he could articulate the consequences of China's monetary policy for the choices that he faces to abate himself of some of the pressure with regard to his own actions, but also to put the spotlight on it and to increase pressure on China to stop doing it.

  • 10:25:48

    MORICIFor example, to maintain their currency, they buy dollars every day. They turn around and use those dollars to subsidize oil imports. They regulate the price of gasoline and diesel over there. That pushes the adjustment of tight supplies on the rest of the global economy, including the United States. He could talk about that, but in doing so, he starts to get into the business of the Treasury. And the Treasury has not been very good in articulating criticism of other countries' policies as it affects us.

  • 10:26:16

    REHMHow much has demand actually begun to decline?

  • 10:26:23

    MORICIIt's not a lot, but the point is, is that it's growing very rapidly abroad. Demand in the United States is not driving up prices. Global oil production has not changed very much, but demand has gone up a lot.

  • 10:26:36

    REHMDo you see prices going down anytime soon, Martin?

  • 10:26:41

    BAILYI don't think I can predict what's going to happen to oil prices. As Peter said -- by the way, I don't think I'm ready to blame all our problems on China. But as Peter said, this is a global phenomenon. And price -- oil demand is going up around the world. It's gone down, I read, about 2 percent -- the demand for gasoline in the United States -- so we are doing a little bit. I think there was bigger decline last time prices went up. I think Americans are sort of getting used to the idea of paying higher prices. But it's mostly a globally determined price.

  • 10:27:17

    REHMIt's interesting that New York Times editorial called on Congress and the administration to do a better job of addressing the nation's economic problems through fiscal policy. The Times wants something done. Binyamin.

  • 10:27:39

    APPELBAUMWell, just to be clear, the Times editorial page has nothing to do with the Times news section. So...

  • 10:27:43


  • 10:27:44

    APPELBAUM...that's not my voice you're hearing. But, you know, a lot of people do take the view that Congress needs to be a part of the answer here. And it underscores something that Peter has been saying, which is that the Fed really is limited, and it sometimes does itself a disservice by not underscoring the extent of its limitations. It cannot single-handedly create an economic recovery. It cannot accelerate the pace of growth. It cannot address global trade imbalances. It needs help.

  • 10:28:13

    APPELBAUMAnd one of the classic ways of helping an economy to recover is fiscal stimulus, is the government increasing the amount of money that it's spending. That's obviously not happening right now. In fact, the cuts in government spending took about a percentage point off of GDP growth in the first quarter. So we're going in the other direction. And while Chairman Bernanke didn't talk about this yesterday, in essence, you know, there's a sense in which that half of the government is undercutting the things that he is trying to do.

  • 10:28:39

    REHMWell, and you've also got people on the Federal Reserve itself criticizing the Fed's policy of buying bonds.

  • 10:28:47

    MORICIThere's a very important problem here, and there's a very simplistic view of the economy. People take principles of economics, where they learn, well, more money drives up prices. Well, as Martin, I think, will agree, more money only drives up prices. If you're at sort of full employment -- that is, you have too much money chasing the same number of goods -- but, I mean, if you have the amount of slack we have in the economy right now, putting liquidity into this system doesn't necessarily cause inflation.

  • 10:29:15

    MORICIBut people see inflation outside, they see more money, so they go, voila, the Fed caused it. In reality, we are a smaller economy relative to the globe today, and we can be affected by events abroad and the events that are happening in Asia. It's not just China, Martin -- though they are convenient to talk about because they're so vivid in what they do -- is the growth in Asia is driving up commodity prices. Growth in developing countries, countries that are in transition are very commodity-intensive. Think about building the whole international -- interstate highway system all at once. You know, they use a lot of steel, a lot of concrete, a lot of lumber and a lot of oil, and they use it inefficiently.

  • 10:29:52


  • 10:29:53

    APPELBAUMThe question of exactly what impact, you know, Chinese demand for commodities and oil is having is a complicated one and a controversial one. But I do want to note one central irony, which is that for the longest time, the primary economic impact of nations like China was to reduce prices in the United States. It made things here cheaper. And we have now had a 180-degree turn in the conversation, and the primary tendency now is to talk about the extent to which China is making things here more expensive.

  • 10:30:19


  • 10:30:21

    BAILYWell, it's lowered the price of one set of things. It's raised the price of commodity, so it's a two-handed thing. We were talking about whether fiscal policy could step in and do more, and, in principle, I think it could. The trouble is we've got this huge deficit, I mean, and huge deficits looking ahead. We don't know where the cliff is, at which point the United States is going to start having trouble borrowing. It is not having trouble borrowing now, and we can finance our deficit, assuming we raise the debt limit. But we don't know where that cliff is. So I think there are limits on fiscal policy right now, as well as monetary policy.

  • 10:31:00

    REHMSo, from your perspective, are Americans better off now than perhaps if the Fed had made no intervention at all? Or are they worse off with QE1 and QE2? Martin -- sorry. Peter.

  • 10:31:24

    MORICIWe are much better off.

  • 10:31:26

    BAILYI think we are better off, yes. I'd agree with that.

  • 10:31:28

    REHMDo you all agree with that?

  • 10:31:30

    APPELBAUMI don't know too many serious economists who would dispute that that's had a positive impact.

  • 10:31:34

    REHMAnd is it time to bring it to an end, Martin?

  • 10:31:40

    BAILYI would bring it to an end, although it's a close call. You certainly don't want to -- to some extent, inflation is what people expect it to be. So if you generate a lot of fears of inflation, that can have a negative impact. I mean, one of the reasons we are having a sluggish recovery is because businesses are reluctant to hire and somewhat reluctant to invest. And so part of what we have to do is create confidence in our economy. So I think they've done about what they can in terms of that quantitative easing. I wouldn't do another step, but if things get worse going ahead, one would have to revisit that decision.

  • 10:32:18

    REHMWhat do you think, Peter?

  • 10:32:20

    MORICII wouldn't add to the balance sheet any further, but I wouldn't subtract from it either. For example, as the mortgage-backed securities come in, using those monies to buy, you know, more treasury security so the balance sheet is in neutral would make sense to me. I think that extending QE2 would make sense if he could do a better job of selling it. But, frankly, he's getting so much criticism, and its consequences are not of huge benefit -- I mean, there are some benefits, but they're not huge -- that he, frankly, endangers the independence of the Fed. To say, as economists, we can stay outside the realm of politics is silly. This is partially a political exercise.

  • 10:32:57

    REHMPeter Morici. And you're listening to "The Diane Rehm Show." We'll go to the phones now. First to Indianapolis. Good morning, Jeff. You're on the air.

  • 10:33:11

    JEFFHi. Good morning, Diane. As I listened, actually, I have a real quick comment about oil before I get in to my question about (unintelligible).

  • 10:33:15


  • 10:33:18

    JEFFHowever, you know, the International Energy Agency, Boone Pickens, the late Matthew Simmons, everybody agrees that the world reached peak oil production at about 85 million barrels a day in around 2006, 2008. This year, world demand is expected to reach 89 million barrels a day, so that's simple supply and demand. And I would strongly urge you to devote an entire show to the concept that peak oil is way too complex a subject to get into right now.

  • 10:33:42

    REHMActually, we have done at least one program on peak oil. Go right ahead, though, Jeff.

  • 10:33:49

    JEFFOh, thank you. I wish I -- sorry I missed that.

  • 10:33:51


  • 10:33:53

    JEFFIf -- my question has to deal with the value of the dollar, and I think the -- putting this perspective for the average person, you know, how the dollar has been devalued. At one point, the Canadian dollar was worth about 62 cents American. You know, as it stands today, the Canadian dollar is worth more. You bring Canadian dollar over here, and it's worth a dollar five, American. So, if you watch the graph of the value of the dollar, even during Bernanke's speech yesterday, you saw it decline. So my question is how much lower can the dollar go? Do we have a breaking point, you know, for the devaluation of the dollar?

  • 10:34:22

    REHMMartin Baily.

  • 10:34:23

    BAILYI'm one of those heretics that thinks that having the dollar go down is a good thing. We have been running trade deficits for years and years and years, and the biggest reason is because the dollar has actually been too high. We've sucked enormous amount of capital into the United States, capital flows coming in. Now, I know that's heresy. And I said that in a congressional testimony one time, and one other congressman said to me, what, you want a low dollar, a weak dollar?

  • 10:34:49

    BAILYI said, I don't want a weak dollar. I want a dollar that makes us competitive. And, I think, with 1.45 to the euro and the value against the Canadian dollar, I think we are pretty competitive. The problem, of course, is that the economies of Europe and to some extent Canada are a bit weak themselves. We are, in a way, helping ourselves at the expense there. But if you look at the history and the big deficits we've been running, I think, the dollar right now is probably about right, except against the Chinese currency. And I agree with Peter on the need to change that.

  • 10:35:23


  • 10:35:25

    MORICIYeah, if we got an adjustment against the Chinese currency, we could do a lot to deal with our trade deficit -- I mean, a genuine adjustment, not 5 or 10 percent because it's about 40 or 50 percent out of alignment. If that happened, then the U.S. dollar would become stronger against other currencies because part of what's happening is we're adjusting. I would also like to comment on what the caller said about the Canadian dollar. It is not useful to evaluate the U.S. dollar against the Canadian dollar or the Australian dollar as a marker because those are very resource-intensive economies.

  • 10:35:58

    MORICIAnd, at this time, they're booming away because of all the stuff they are sending out in this resource boom. So they're going to have naturally stronger currencies than the rest of us. It's more relevant to look at the dollar against the euro or the pound.

  • 10:36:11


  • 10:36:13

    APPELBAUMI guess, you know, I just underscore this issue of exports, which is, you know, when you think about where growth may come from, for the American economy going forward, one of the most obvious, one of the few obvious places is an increase in our exports. A weaker dollar helps to accomplish that.

  • 10:36:28

    REHMBut do you believe that Fed policy has actually driven down the dollar?

  • 10:36:36

    BAILYWell, the dollar is somewhat sensitive to interest rates. So there are a number of factors that determine the dollar, both the capital flows and the trade accounts, and the capital flows tend to predominate in the short run. So to the extent that the Fed policy kept interest rates low and kept the expectation of future interest rates low, that does lower the dollar a little bit. And the Europeans are now talking about raising interest rates, and so that will push up their currency. I think that's a mistake on their part, by the way. They should keep their interest rate low, but, yes, a little bit of effect on the dollar.

  • 10:37:15

    MORICIThat's essentially right. When you have a gap and interest rates develop, you get a certain amount of hot money that flows. And once that's happened, it's happened, so you get sort of a one-off adjustment.

  • 10:37:24

    REHMPeter Morici, he is professor of international business at the University of Maryland. He's former director of economics at the U.S. International Trade Commission. More of your emails, your telephone calls when we come back.

  • 10:40:03

    REHMAnd we're back talking about the Federal Reserve Chair Ben Bernanke's comments on the economy yesterday, in the first ever live news conference held before a gaggle of reporters. Here's an email from Nicholas who says, "I'm a student. I support myself by working full-time. Last year, I made a grand total of $13,464. My rent alone is $6,500 a year. The idea of inflation terrifies me, and I imagine the armies of the unemployed feel the same. I think Ben Bernanke is making the right choice. It's better to have a slow recovery than to see hundreds or thousands of people starving and/or living on the street." Binyamin.

  • 10:41:11

    APPELBAUMYou know, it's important to understand that inflation is actually good for some people, namely borrowers. So I always struggle a little bit to understand why someone in that position would feel so threatened by inflation. Inflations are problem for rich people with a lot of savings. It can be a problem for the economy as a whole, but it can have some fairly important re-bouncing effects in the short term for lower-income people. That said, obviously, the Fed does need to trade off between the extent to which inflation can be helpful and the extent to which, ultimately, it can damage levels of employment.

  • 10:41:42


  • 10:41:43

    BAILYWell, first of all, I'd like to congratulate Nicholas on keeping himself in college and...

  • 10:41:48


  • 10:41:48

    BAILY...still working full-time. That's a very considerable achievement that he should be very proud of. I had a silver spoon in my mouth compared to what he's having to do. In terms of inflation, I can understand why he feels threatened as he sees these prices go up. But I think you should also remember that if we could get more employments, if we could begin to see some increase in wages so that the economy were recovering, I think the job opportunities open to him, both now and when he graduates, would be much better. So it's not just inflation. It's getting that growth going that, I think, in the end, is going to be so important to him.

  • 10:42:25

    REHMBut, of course, he's not looking at the larger picture. He's concentrating on what he can earn and what he has to pay. He's watching prices go up as his salary is not going up.

  • 10:42:41

    MORICIWell, absolutely. You know, if you're making, say, $60-, $70,000 a year and your salary goes up with inflation and you own a home, then you're part of Benjamin's debtor class, that inflation is actually helpful. But a good number of the working poor and new working poor in America rent. They don't have a mortgage. They pay very high interest rates on credit cards. And the kind of inflation we are having right now is particularly damaging to them because they're probably only driving as much as they have to drive already. They don't have the luxury of running out and spending $20,000 on a 40-mile-to-the-gallon Ford Fiesta. They have an old clunker in the driveway, and they have to buy food. And this is a phenomenon that's going around the world.

  • 10:43:25


  • 10:43:26

    MORICIAs Asia booms and those folks become better off, the lower, middle-class and poorer folk around the world are taking a terrible hit in the form of these higher prices.

  • 10:43:39

    REHMAnd here's a comment posted to the drshow website. "I believe Mr. Bernanke and some of your guests must live in some bubble since most Americans experience every day a decline in their purchasing power because of price increases. In fact, the cost of most essential consumer goods and services that people need every week have been on an upward trend since the recession began two years ago, and the current oil spike is not based simply on supply and demand. Since there is an ample supply in the U.S. world market, it results from the Fed's cheap dollar policy, which have driven up commodity prices. Bernanke's policies have only created more financial pain for American consumers." Binyamin.

  • 10:44:43

    APPELBAUMIt's certainly feels that way to a lot of people.

  • 10:44:45


  • 10:44:46

    APPELBAUMAnd there's two very important points. The first is that that pain is real. It's happening. People are struggling as a consequence. Higher oil prices are basically like a tax increase on American families in terms of the way that they hit people. But the second important point is that it's not true that the overall cost of living in America is increasing. Housing prices have been in freefall. That reduces costs. A lot of other types of prices are fairly stable for larger purchases. And even when food prices go up, that tends to hit countries, you know, where food, where actual, you know, wheat, say, is a much larger part of what people are buying day-to-day.

  • 10:45:24

    APPELBAUMIn America, where we eat processed foods, higher food prices actually come across to us as a smaller proportion of the total cost of what we're buying. With all that said, you know, clearly, there is a real pain and a real problem.

  • 10:45:37

    REHMMartin Baily.

  • 10:45:38

    BAILYWell, I think it's a question of identifying the causes. I mean, I admit that some of us live in a bubble. We have secure jobs and decent incomes, but I do try to look around at the world and the people that are suffering this. So I'm not unaware of the pain that's going on around the country and, indeed, around the world. But I think that our listener, the person who sent in that email, should realize that if you can get a full-employed economy of the kind that we had in the late 1960s, the kind that we had in the late 1990s, and you started to see rises in real wages -- that's to say wages even after adjusting for inflation -- then he and others will be much better off. That's what we need to achieve.

  • 10:46:21

    MORICISee, there's only a limited amount of oil in the world, and the economies that are growing rapidly at 8 or 10 percent a year, they can handle these price increases and still have their standard of living rise. But when we are growing at less than 3 percent a year, we're likely going to see living standards fall.

  • 10:46:35

    REHMLet's go to Al in Charlotte, N.C. Good morning to you.

  • 10:46:41

    ALGood morning, Diane. Thanks for taking my call.

  • 10:46:44


  • 10:46:45

    ALI have a question. You guys talked about the price of oil being up because of the demand and so on, but no one is talking about the real reason for the price of the gas and the oil and all that, the commodities blowing up. There's been speculation in the market, all this speculation in the market, driving the price up. I mean, The Wall Street had said it -- The Wall Street Journal had said it, everybody is talking about it, but no one in your show is talking about it today.

  • 10:47:11

    REHMLet's see. Binyamin.

  • 10:47:13

    APPELBAUMIt's not an issue that I have great expertise about. It's obviously a controversial thing, but I am not qualified to comment.

  • 10:47:18


  • 10:47:19

    BAILYSpeculation could -- can push up the price of oil temporarily, but at some point...

  • 10:47:25

    REHMBut is it doing so now?

  • 10:47:28

    BAILYIt probably is a little bit. But the fundamental is, as I think we've all agreed, is that supply has to match with demand, and nobody's holding a lot of oil behind. So it's really, I think, supply and demand that fundamentally determines it. The speculation sort of affects it a little bit in the short run, but around a basic supply-demand determination.

  • 10:47:51

    REHMPeter, how do you get past the idea that Al has -- and probably lots of people have -- that speculation is what's driving, at least in part, oil prices?

  • 10:48:07

    MORICIWell, when you speculate in gold, you can hoard it and keep it and store it. When you speculate in oil, you have to sell it because it spoils, and it's too big and bulky to keep around. So speculators can drive prices for a little while, a few weeks, even a few months, but they have to offload it. Most economists expect that the price of oil to be $105 to $110 a barrel by summer. What happened in the Middle East and in Africa just move that forward a bit in time. Also, frankly, China and India are growing more rapidly than, once again, the forecast has predicted. You know, everybody keep saying it's going to slow down over there, and it never seems to. That does absorb oil. That's not to blame them. But growth takes oil, and that's happening in the world.

  • 10:48:49


  • 10:48:50

    APPELBAUMI think, you know, it's worth stepping back to the broader question, you know, which is even if it's the case that -- you know, that speculation is driving up oil prices -- and it certainly is the case that oil prices are higher -- what can be done about it? And what the Fed is really saying is that it does not make sense to respond to these short-term fluctuations because they will not spread into the broader economy, they will not cause broader prices to rise, and, therefore, to respond to this now would be counterproductive. As painful as it is in the short term, Mr. Bernanke has said that he expects it to subside. That's not a unique opinion, by any means. And if it does, then it makes more sense to essentially just grin and bear it for the time being.

  • 10:49:31

    REHMHere's an email from Allan in Little Rock, who says, "I heard fear in Ben Bernanke's voice yesterday. I think he is a good man. I just get the feeling Ben knows how bleak things really are and will continue to be for a long time. I think five to eight years," says Allan, "for the average Joe and Jane and their little ones, but he is unwilling to speak truthfully to the public because all that would do is to create panic." Peter.

  • 10:50:13

    MORICIHaving listened to Ben Bernanke over time, that's just the way Ben Bernanke's voice sounds. Whether he's happy or sad, he has that certain apprehension in his voice. He's very professorial. I don't believe that he was...

  • 10:50:26

    REHMI don't think of professors as being sort of scared-sounding.

  • 10:50:32

    APPELBAUMHe's not a great orator. He's not a great orator.

  • 10:50:34

    MORICIGreat orator. That's right. He would not be a -- he's not naturally a great talk show guest. It's just not his style. But I didn't hear fear in his voice yesterday. I think that economists, generally, have some apprehension about the future. The U.S. economy during the Bush years grew at less than 3 percent. Now, the outlook is even lower. Once you get down to about 2.5 percent growth, you're growing so slowly that it's easy to fall off because in the slower growing sectors...

  • 10:50:59

    REHMWhat does that mean, to fall off?

  • 10:51:02

    MORICIOkay. In the slower-growing sectors, those that are growing, say, 1.5 to 2 percent 'cause there's others that are growing 3 to 3.5 percent, you can start to cover what you need to make and lay people off at the same time because your productivity growth is greater than your output growth. So you start to see increases in unemployment claims and so forth. In fact, we're seeing that right now. We're getting to the point where this recovery is going from being fragile to even less so, very tenuous and threatened.

  • 10:51:31

    BAILYLet me make a point, though, here because, if we go back to the spring of 2009, the economy and the financial system were really going off the edge. I mean, it was really a desperate time. And at that point, Bernanke and Larry Summers and Tim Geithner were able to turn us back and get us back onto a more stable path and then eventually a growing path. So, yes, there are some concerns about the future, there are some worries about growth and how fast it is. But let's not forget where we were only a couple of years ago and how much better things are than they were just then.

  • 10:52:11

    APPELBAUMI didn't hear fear in his voice yesterday or particularly...

  • 10:52:15

    REHMAnd you were there.

  • 10:52:16

    APPELBAUM...any of his emotions. But, you know, there are reasons for concern, if not fear. There is, you know -- there is a possibility that we are seeing both the onset of higher inflation and a stalling of the economic recovery. And if that combination of things happens, there are not a whole lot of easy answers for what we would do about it. So, you know, it is the case that, I think, there is at least apprehension about, you know, what is going to happen in the coming months. There's a diminishing number of potential responses that policymakers -- not just the Fed but the rest of the government -- has available. And while you didn't hear Ben Bernanke, you know -- he talks in numbers, so it can sometimes be a little bit hard to color what he's saying.

  • 10:52:56

    APPELBAUMBut those numbers are pretty scary. He's saying that, you know, for the foreseeable future, there's going to be incredibly high unemployment, millions of people without jobs, falling out of the workforce, likely never coming back into it. This is, and ought to be, scary.

  • 10:53:10

    REHMBinyamin Appelbaum, he's a reporter for The New York Times. And you're listening to "The Diane Rehm Show." To St. Louis, Mo. Good morning, Richard.

  • 10:53:24

    RICHARDGood morning, Diane.

  • 10:53:25

    REHMHi there.

  • 10:53:26

    RICHARDThanks for taking my call.

  • 10:53:27


  • 10:53:29

    RICHARDBasically, I wish when you had one of these discussions, you'd have Ron Paul on.

  • 10:53:35

    REHMActually, we're having Ron Paul on in on Tuesday morning.

  • 10:53:42

    RICHARDOkay. But he could counteract a lot of what's being said. The Federal Reserve is the only entity that creates the inflations. Being as the Fed blames this on everybody else, I personally took advice from people that know what's going on. I bought gold at $270 an ounce, and it's going to $10,000 an ounce.

  • 10:54:05

    REHMThat's your belief.

  • 10:54:07

    RICHARDIt's not a belief. It is the fact.

  • 10:54:10


  • 10:54:11

    MORICIBut, you know, I've got this to say about that.

  • 10:54:12

    RICHARDLook what the Fed has done.

  • 10:54:14

    MORICIOh, excuse me.

  • 10:54:15

    RICHARDIt's going to create that much inflation. And if you go John Williams', he's a hedge fund operator. He offers a free website to debunk how the government statistics are lies.

  • 10:54:32

    MORICIWell, you know, if we have a hurricane in the Gulf and it knocks out a couple of refineries, that will raise the price of oil, and if those refineries stay down a long time because it's a big hurricane, then we're going to have higher gas prices. I don't know how could blame that on the Fed. And it happens over and over again in our economy. Unforeseen events drive prices up. The earthquake in Japan is driving up the price of automobiles right now because it's cutting off supplies. To blame all of the problems on the world -- of the world on Mr. Bernanke is completely unfair.

  • 10:55:01

    BAILYWell, I think we just have to disagree on Ron Paul and his view of the Federal Reserve. Federal Reserve certainly made mistakes. I think they made mistake leading up to this crisis. They could've done more to prevent us getting into a crisis. But I think Ron Paul is hurting our country right now.

  • 10:55:17

    MORICII agree with that. I agree with that. It is absolute nonsense to think a modern industrialized society can get along without a central bank. That means basically going back to silver, gold and certificates, and there's simply not enough coin in the world.

  • 10:55:33

    APPELBAUMYou know, one reason the Fed is having these press conferences is because of Ron Paul and his success in raising public awareness of what the Fed is doing and public anger about it. And they really see -- the Fed really sees a need to defend itself and to explain itself better to the American people and to seize back the conversation because it has swung in directions that the Fed views as extremely counterproductive.

  • 10:55:56

    MORICIWe had twins yesterday. The president released his birth certificate for Donald Trump, and Ben Bernanke had a press conference for Ron Paul. That's very close to what happened yesterday.

  • 10:56:06

    REHMDo you think that that's why he had the press conference?

  • 10:56:10

    MORICIThe press conference is really not needed. It's useful, it helps, but he does congressional testimony every six weeks. He gets grilled there with much more intensity than the Fourth Estate chose to grill him yesterday, and I hope they improve a little bit.

  • 10:56:25

    REHMMartin Baily.

  • 10:56:26

    BAILYWell, I do think it's a reason he had the press conference. He wants to...

  • 10:56:31


  • 10:56:31

    BAILY...let people know what his view is. I mean, Ron Paul wants to drag up Watergate and blame the Fed for that. I mean, he's -- Ben is...

  • 10:56:39

    MORICIThis is getting silly.

  • 10:56:40

    BAILYIt's getting silly.

  • 10:56:41

    APPELBAUMI'd just like to bring Peter with me to the next congressional hearing, where Ben Bernanke testifies. It is an occasion for speechmaking by legislators.

  • 10:56:48


  • 10:56:49

    APPELBAUMIt is not a serious question-and-answer session.

  • 10:56:51

    REHMAll right, we'll leave it there. Binyamin Appelbaum, reporter for The New York Times, Martin Baily of the Brookings Institution, Peter Morici of the University of Maryland, thank you all so much. And thanks for listening. I'll be off for the next couple of days, back with you on Tuesday for Ron Paul.

  • 10:57:18

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth and Sarah Ashworth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information.

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