All eyes were on the Fed today as Chairman Bernanke testified in front of the House Financial Services Committee. Bernanke indicated the Fed would maintain its loose monetary stance as long as economic indications warrant it. He cautioned that asset purchases could be scaled back if economic conditions improve faster than expected and inflation rises closer to the Fed's target of 2% inflation.
Core inflation was down 1.1% on a year-over-year basis during the latest reporting month from a recent high of 2% in March 2012. The core CPI, reported yesterday, was down to 1.6% in June, the lowest since June 2011.
According to Bernanke, “low inflation is not good for the economy because very low inflation increases the risks of deflation, which can cause an economy to stagnate. It raises the real cost of investing, and the evidence is that falling and low inflation can be very bad for an economy.” In other words, as long as the core CPI remains at or near all-time highs (see chart below), the Fed’s easy money policy will continue.