The Most Important Ben Bernanke Speech That No One Heard

BOSTON (TheStreet) -- When earnings reports from Apple(AAPL), Bank of America(BAC) and Goldman Sachs(GS) captivated Wall Street and dominated headlines Tuesday, Federal Reserve Chairman Ben Bernanke was speaking at the uncelebratory 56th Economic Conference in Boston.

Federal Reserve Chairman Ben Bernanke

Across the street from the Boston Federal Reserve, Occupy Boston demonstrators asked Bernanke to appear at the protest and speak with them, an invitation he declined. But what the Fed chairman hinted at during the conference, overshadowed by the day's earnings releases and gloomy news from Europe, bears more attention than it received, especially from the protestors.

"With respect to monetary policy, the basic principles of flexible inflation targeting -- the commitment to a medium-term inflation objective, the flexibility to address deviations from full employment, and an emphasis on communication and transparency -- seem destined to survive," Bernanke said in his speech.

Though his comments appear innocuous, some investors and economists are wondering whether he was suggesting that the Fed, which has primarily targeted inflation for monetary policy, would instead target nominal gross domestic product, or NGDP. Bill Gross, who manages the world's biggest bond fund at Pimco, tweeted that "Bernanke's emphasis on 'communications' is likely code for 'targeting' nominal GDP or unemployment."

The central bank for two decades has adhered to the Taylor Rule, which says the Fed should raise interest rates along with increases in inflation. The possibility of shifting away from inflation targeting toward a goal that targets the output gap is a big step for the central bank, and its ramifications for the economy and politics in a presidential-election year would be a game-changer.

"This was a seminal speech for Bernanke," says Diane Swonk, an economist with Chicago-based Mesirow Financial. "There wasn't as much attention called to this speech as there should have been."

While it's true the Fed already has a dual mandate to keep inflation in check and seek to sustain full employment, a change would mean the Fed could better react to economic shocks, such as bank failures or sovereign defaults. The Economist summed up the idea of the Fed changing targets in April: