Bernanke at Jacksonville University on Commodity Price Increases, Fed Balance Sheet and How They Aren't Printing Money (11/5/2010)

Chairman of the Federal Reserve, Ben Bernanke, spoke with an economics class at Jacksonville University. He talked about how the Fed works, how they stopped the financial panic of 2008 (lender of last resort), AIG, the 2009 bank "stress tests", the unwind (tightening policy using interest rates, draining reserves or selling assets), the Fed balance sheet, Treasury securities and reserves in the banking system.

"Sometimes you hear the Fed is printing money, that's not really happening, the amount of cash in circulation is not changing. What's happening is the banks are holding more and more reserves with the Fed".

During Q&A Bernanke was asked if recent commodity spikes (cotton for example) could trickle down to the consumer. Does it threaten your outlook for low inflation?

"You're absolutely right that the one exception to the general observation that inflation has been coming down is that globally traded commodities like energy and food and other commodities have been going up pretty sharply, and the reason for that basically is because the supply and demand is determined on a global level and emerging markets are growing quite quickly and the demand for those commodities is pretty strong. So that is going to be a contributor to inflation in the U.S. because it will affect for example gas prices and so on.

Our research and our experience though suggests that generally speaking when you have a situation like we have today where there's a lot of slack in the economy, a lot of excess supply, that it's very very difficult as you were saying for producers to push through those costs to the final consumer. In addition, most of the costs that producers have are labor costs, and wages have been growing relatively slowly. Productivity has been growing relatively strongly which means that overall the cost of labor per unit of production is in some cases actually falling. So although you have higher materials costs or higher energy costs you have lower labor costs. So you put that all together and you don't expect to see very much inflation, or... commodity prices being passed through to final goods and services with a few obvious exceptions like gasoline of course".

C-SPAN VIDEO LINK - Hat tip PragCap