Bernanke Preps for His Barney Frank Showdown

As Federal Reserve Chairman Ben Bernanke heads to Capitol Hill today, we could see some of the most interesting and perhaps combative testimony on monetary policy since Paul Volcker informed the nation that he was going to break the back of inflation in the late 1970s.

Before a recent meeting of the National Bureau of Economic Research, Bernanke provided a sweeping intellectual tour de force on all things inflation. The market, of course, focused on the elements of the speech that addressed the anchoring of inflation expectations, which provide the intellectual underpinnings of Fed monetary policy.

Overlooked by the mainstream media was Bernanke's uncharacteristically blunt denunciation of a proposition that there is a basic trade-off between inflation and unemployment, a view still favored by many in Washington. The chairman made the case that this idea, better known as the Phillips Curve, has been "entirely discredited" and that the policy prescriptions based on the theory have caused "very bad outcomes whenever they have been applied."

In the days after his well-received remarks, many in the market who closely monitor the Fed have been wondering what could have led Bernanke to make such an unusually harsh statement, especially given the chairman's collegial disposition.

However, when one takes a look at the musings on monetary policy emanating from Capitol Hill over the past several months, this rather interesting development can be clearly explained and has some rather delicious implications for Bernanke's two-day testimony before Congress, starting Wednesday.

House Financial Services Chairman Barney Frank (D-Mass.) has recently intimated that the new majority in Congress would like to have greater input in the making of monetary policy and the setting of rates. Moreover, Congressman Frank has in the strongest terms urged the chairman not to implement an inflation-targeting regime, which lies at the heart of the intellectual and policy framework that has guided Bernanke throughout his entire career.