Chairman Bernanke, peppered at his first press conference with questions focusing on inflation, attempted to explain how the Fed’s extremely accommodative policy squares with its twin mandates of maximum employment and stable prices, and ended up seeming to contradict himself.

It turned out to be no mean feat. The press release issued by the Open Market Committee moments before the press conference notes, “[i]nflation has picked up in recent months” and the “unemployment rate remains elevated.” The March CPI survey showed headline inflation at 2.7%, above the “2% or a bit less” that the Fed targets over the longer term.

The Fed’s updated economic projections, released at the start of the press conference, show deterioration in the economy concomitant with rising inflation. The Fed now expects real GDP to increase by 3.1% to 3.3% this year from expectations of 3.4% to 3.9% in January and that core inflration, excluding certain food and energy prices, will clock 2.1% to 2.8% from 1.3% and 1.7% three months earlier.

Many of the press’ questions focused on inflation in one form or another, which is where he seemed to contradict himself. While the chairman echoed the FOMC’s statement that “long-term inflation expectations have remained stable and measures of underlying inflation are still subdued,” when pressed, he admitted that surveys and market series are showing expectations of increasing inflation.

During one of his answers, Mr. Bernanke admitted that the Fed is unlikely to conduct another round of large scale asset purchases precisely because inflation expectations and headline inflation are elevated – he is unsure whether he can get a further improvement in payrolls without further inflation risk.

More than one reporter was concerned about the dollar and its decline against most other currencies. While averring to Secretary Geithner about dollar policy, Mr. Bernanke noted that a strong dollar is in the best interest in the both America and the world. The Fed, stated Bernanke, is attempting to craft policy which keeps inflation stable and low in the long term as well as promote a stronger American economy, two factors Mr. Bernanke feels are key to the long term value of the dollar.

Fundamentally, Mr. Bernanke doesn’t view the Fed’s policy, which has seen the Fed’s balance sheet triple since the start of the Great Recession, as that extraordinary. He said that he doesn’t view current policy as that different from “normal policy.” The Fed, he continued, has a lot of experience in how changes in interest rates and the stock market affect the economy. Further, he believes that when the Fed winds up its second large scale asset purchase program in June, that there will be little effect on the markets. While the market had as much warning at the end of the first asset purchase program, the S&P 500 did decline 16% after the program.