Bernanke Interview: Business Planning Implications

Federal Reserve Chairman Ben Bernanke took the unprecedented step of answering questions after today's policy meeting. You can watch the video or read news coverage almost anywhere. What does this mean for a business leader planning his or her company's future? There are three key points.

The Fed is Moderately Optimistic. They expect the economy to grow next year in the range of 3.5% to 4.2%. The average of most economists is about 3.2 percent. The Fed's forecast is in the upper quartile of the range of private-sector forecasts–it's plausible but not average.

In general, the Fed is not any better than others at forecasting the economy, but it's worth knowing what they think. It should also be a wake up call for those who think we're certain to fade soon.

The Fed will keep inflation under control. Ben Bernanke made clear that they are not too worried about rising commodity prices in themselves, but they would be concerned if either of two things happened. First, if commodity price inflation spread across the broad range of prices that people face. Second, the Fed would be concerned if people's "medium-term" inflation expectations rose. Expect the Fed to tighten when they see a high risk of either of those problems. Bernanke also stressed that there were time lags in monetary policy, so they would react to their own forecast of worsening inflation, rather than wait for inflation to actually rise.

So businesses should not expect the Fed to solve the problem of high commodity prices, but they should not worry (too much) about rising costs for labor or manufactured goods.

Interest rates will eventually rise.  The Fed believes that current rates are not sustainable, but it's too soon to push rates up. They don't have specific dates in mind for their future tightening, but they know it will have to happen. If you're a corporate treasurer, I'd budget for higher interest expense in 2012, and a lot higher expense in 2013.  But Ben didn't say that–it's just my interpretation of Fed policy and the likely shape of future data.