Hasn't Bernanke learned anything about the false trade-off between inflation and unemployment

Inflation only lowers unemployment by temporarily tricking people into think that they are getting better wage offers than they actually are. When people learn that they have made a mistake, they go back to being unemployed again. In the mean time they are doing work that they regret taking.

Inflation the last two months has been going at a 2.8 percent annual rate over the last three months. That seems like a fairly normal inflation rate for the last couple of decades.

Here is what Bernanke said (see also here):

The longer-run inflation projections in the SEP indicate that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below. In contrast, as I noted earlier, recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run. In particular, at current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight (the short-term real interest rate is too high, given the state of the economy), and the risk of deflation is higher than desirable. . . .

As of June, the longer-run unemployment projections in the SEP had a central tendency of about 5 to 5-1/4 percent--about 1/4 percentage point higher than a year earlier--and a couple of participants' projections were even higher at around 6 to 6-1/4 percent. The evolution of these projections and the diversity of views reflect the characteristics that I noted earlier: The sustainable rate of unemployment may vary over time, and estimates of its value are subject to considerable uncertainty. Nonetheless, with an actual unemployment rate of nearly 10 percent, unemployment is clearly too high relative to estimates of its sustainable rate. Moreover, with output growth over the next year expected to be only modestly above its longer-term trend, high unemployment is currently forecast to persist for some time. . . ..

Bernanke is right that the economy is growing "too slowly to bring down unemployment." The objection is how Bernanke and Obama is trying to fix the problem. Bernanke may need that he feels that he needs to do more extreme measures because the Obama administration is creating so many disincentives, but that doesn't justify Bernanke doing things wrong also.

The fall in the value of the dollar likely signifies two things: that few want to invest in the US and that inflation is going to increase.

The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports.

Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro. . . . .

As the WSJ notes, Bernanke is only concentrating on unemployment, and he should be honest, rather than the bizarre comment that a 2 percent inflation rate is "too low."

Mr. Bernanke broke no new ground in explaining why he believes inflation at less than 2% is too low and why the Fed must encourage greater inflation to reduce the 9.6% jobless rate. "Inflation is running at rates that are too low [his emphasis] relative to the levels that the [Fed Open Market] Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run," he said. That dual mandate is to maintain stable prices and low unemployment, and Mr. Bernanke's message couldn't be clearer that cutting the U.S. jobless rate is now Job One at the Fed.

We were more struck by what Mr. Bernanke didn't say. In a nearly 4,000-word speech about inflation, the Fed chief never once mentioned the value of the dollar. He never mentioned exchange rates, despite the turmoil in world currency markets as the dollar has fallen in anticipation of further Fed easing. . . . .

Another piece is here.