After three months of ugly job growth, poor retail sales, missed inflation targets and forecasts of minimal economic growth (most analysts reduced their estimate to around 1.1% for the second quarter of 2012), Ben Bernanke finally announced his willingness to “be prepared” for further steps to boost the economy.
The Federal Reserve stands ready to offer additional monetary support to a U.S. economy that has slowed significantly in recent months, Fed Chairman Ben Bernanke told lawmakers on Tuesday.
He told the Senate Banking Committee the recovery was being held back by tighter financial conditions due to Europe’s debt crisis and uncertainty surrounding U.S. fiscal policy.
This is classic buck-passing. The problem is not Bernanke’s fault, not the lid he has clamped at 2% inflation. It’s everyone else ruining it for him, you see.
But the “future action,” even if we see it coming out of the next Fed meeting in early August, would only mimic previous actions on quantitative easing, in all likelihood. And there has been little indication that this has materially improved economic circumstances. It’s been difficult to get the lower interest rates into the hands of those who need them, and that credit clog has limited Federal Reserve policy. The Fed could and should, if they want to make a difference, undertake more unconventional measures, like saying they could tolerate a higher inflation target:
It also suggests that a change in language to something like this:
“In one participant’s judgment, appropriate monetary policy would lead to inflation modestly greater than 2 percent for a time in order to bring unemployment down somewhat faster.”
[That] would be both surprising and effective in raising inflation expectations and boosting the broader economy. Indeed, if the Fed were to change the language to something like that, it probably wouldn’t need to do any additional asset buying. Which, you would think, would be the Fed’s desired outcome (given its focus on the risks of more purchases). But such is the power of the inflation bogeyman in the mind of the central banker that the easy, effective, in-many-ways-less-risky option is avoided in favour of purchases without a change in communication.
It really couldn’t hurt to try and use the communications channel here. I mean, Bernanke suggests that unemployment will improve only at a “frustratingly slow pace”. But he’s not frustrated enough about that to alter inflation expectations, even though the Fed is currently missing the mark on those as well.
You cannot look at the performance of the policymakers and have any confidence that we will navigate the pitfalls that would lead to another recession, let alone promote a stronger recovery.