FOR the blogosphere, the most entertaining part of the Federal Reserve's meeting today was Ben Bernanke's defence during the press conference against Paul Krugman's charge that he has betrayed his academic past in failing to ease more aggressively and aim for higher inflation. That is a pity because while it was great theater, it obscured a more important revelation. Not only is Mr Bernanke still a dove, he is increasingly an isolated dove, and that isolation has significant consequences for monetary policy, the economy and the markets. The statement released by the FOMC was largely as expected and a non-event for markets: “economic growth [will] remain moderate over coming quarters and then … pick up gradually,” inflation will fall from its temporarily elevated levels to 2% or lower, and the Fed expects to keep interest rates “at exceptionally low levels … at least through late 2014.”

The projections released along with the statement were far more interesting. FOMC members reduced their forecasts for the unemployment rate, and nudged up the outlook for inflation. That hawkish combination was made doubly so by the fact that just four of the 17 FOMC members think the Fed should start tightening after 2014, down from six in January. The hawkish impression was reinforced by Mr Bernanke's defence against Mr Krugman (whose name never came up but whose New York Times Magazine article, judging by the questions, had been read by all the reporters in the room). Mr Bernanke flatly rejected the accusation that he is acting inconsistently from the advice he gave the Bank of Japan over a decade ago, noting that Japan was in deflation then and America is not now, in no small part thanks to the aggressively easy monetary policy the Fed has pursued. He went on to argue that deliberately targeting higher inflation as Mr Krugman advises (because it would reduce real interest rates) in pursuit of a slightly faster fall in unemployment was a “reckless” tradeoff. Judging from my twitter feed, Mr Krugman's partisans outnumber Mr Bernanke's by a hefty margin. Mr Krugman himself dismissed Mr Bernanke's response as “Disappointing stuff.” Yet look past the proxy fight between Mr Bernanke and the future Nobel laureate he lured to Princeton in 2000 and you get a different picture. On multiple occasions Mr Bernanke emphasized the Fed was willing to ease again: it was “entirely prepared to take additional balance sheet actions … [and] will not hesitate to use them should the economy require that additional support.” He helpfully offered a benchmark for his expected pace of job growth (150,000 to 200,000 per month), strongly suggesting that a few more months like March, when payrolls rose just 120,000, will put a third round of quantitative easing (QE3) firmly back in play. He rejected one reporter's suggestion that the 2% inflation target was a ceiling; “it's a symmetric objective.” Both today and at his January press conference he made it clear he would tolerate inflation above 2% if unemployment wasn't falling quickly enough, the exact opposite of the message that emerged from his defence against Mr Krugman. That's not bluster; it's precisely what he's doing: both headline and core inflation are at or above 2% but the only policy option on the table is easing, not tightening. And he implicitly dismissed the FOMC's more hawkish outlook by in effect saying he didn't share it so it didn't matter. Asked to define “exceptionally low,” he said he personally thought it meant close to the present level of the federal funds rate (between zero and 0.25%). This means, judging from the projections, that 13 of the FOMC's 17 members want to tighten sooner than he does, and none want to tighten later. Mr Bernanke's dovish rhetoric may not have registered on twitter, but it certainly did in the markets; it's why the long bond yield, after initially rising on the FOMC statement and projections, ended the day little changed.

Markets, then, have surmised that Mr Bernanke retains an easing bias, and that will drive Fed policy, not the weighted average of his colleagues' views. This view is largely correct; but there are two problems with it. First, as the ranks of doves on the FOMC dwindle, the balance of Fed chatter between meetings will become more hawkish, which will cause markets to periodically price in tighter policy. That will make financial conditions and thus monetary policy tighter. Recall how publication of the March FOMC minutes tanked the bond market when it disclosed only isolated, and tentative, support for QE3. This almost certainly overstated the shift in Mr Bernanke's own views but markets had no way of knowing that.

The second problem is that even if Mr Bernanke's views prevail while he remains chairman, the odds are that he no longer will be after January, 2014. He is unlikely to be reappointed even if Barack Obama is re-elected (even if wanted the job, a big if, he probably couldn't be confirmed), and certain not to be if Mitt Romney wins. So someone else will make the call on when to start tightening. Whoever that person is will feel the burden of every newly installed central banker of demonstrating his or her anti-inflation credentials and independence from the person who appointed them, which biases them to tightening. Being dropped onto a committee already stacked with hawks only increases the pressure.

Bernanke vs Krugman is fun to watch, but it's a false dichotomy. For those who want a more aggressive and easier Fed, Mr Bernanke is the best ally they've got.

(Picture credit: Wikimedia Commons)