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The Chairman of the US Federal Reserve, Ben Bernanke  discusses the new inflation target of the central bank. The tight target of 2% pushes the dollar to higher ground.

Bernanke says that setting an employment target is much harder, and provides various reasons for it.

Update: Comments about the balance sheet help the dollar rise towards 1.31 once again.

Updates from the press conference:

  • Asked about QE3, Bernanke doesn’t really answer the question. “We continue to review our holdings and take further steps”, and says that this option is on the table. Nevertheless, this is in line with the statement, and consists no higher chances of QE3.
  • Regarding low rates for a long time, Bernanke uses the members’ forecasts to prove that it’s not only his opinion. Asked about the bashing he gets from Republican candidates, Bernanke refuses to provide any response and says that savers are dependent on a sound economy.
  • Bernanke says that inflation is a bit below the 2% target, because of various reasons, including no rises in wages. Bernanke reiterates his point from the past about the price of a long crisis: workers are losing their skills.
  • “Too big to fail” banks – Basel committee should provide guidance…
  • Balance Sheet: New information will be provided in a few weeks. “We need more time”. This will be very interesting to see – how members see QE3. Bernanke says that there is room to act if unemployment is high and inflation is low.
  • About interest rates: The Fed usually acts through rates, but they are already low. Is he frustrated? His voice remains soft.
  • Negative equity is 700 billion dollars! Principle reduction has advantages but depends on the structure and the alternatives.

The dollar initially suffered a significant drop after the FOMC Statement that included an updated clause about the commitment for low interest rates, from mid 2013 to “late 2014”.

It then managed to recover later on. The Federal Reserve released forecasts of each individual member and set a goal of 2%. This is a relatively tight goal, and the dollar fell.

As Jamie Coleman says:

If the Fed has an inflation target, it can’t sit back and let prices run-away, even if the target is aimed at the “long run”.

Indeed, Ben Bernanke is not Jean-Claude Trichet, where every small rise in headline inflation meant a tougher monetary policy. Inflation can run a bit higher in the US, without intervention.

EUR/USD is struggling with the 1.3060 line once again. Earlier it crossed 1.31. It will be interesting to see if the pair returns to the 1.30 – 1.3060 range, once the storm calms.

Bernanke’s soft voice seems to slow movements in the markets.

For more on the euro, which is struggling with a potential Greek default, see the EUR/USD forecast.