Federal Reserve chairman Ben Bernanke is giving a closely watched speech in Jackson Hole, Wyoming at an annual economic symposium. And I can summarize this speech for you in metaphor.
Water works well at fighting fires.
Everything is on fire.
We may hook up the hose at some point.
Not promising anything.
That’s the sense I get from the speech. Bernanke tries to pull off a mean trick: defending his record while declining to actually continue with the same policies even though we’re in the same economic climate. Either the monetary tools at the zero lower bound worked, or they didn’t. If they worked, we’re still in the position where they would need to be employed. If they didn’t, then Bernanke’s previous record has to be called into question. And you have to ask how they worked when the Fed has missed its inflation and employment targets consistently for the last three years.
In summary, Bernanke said that “the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.” But there’s a wide gulf between not ruling out further use of policies and committing to use them. Frankly, there’s no difference between the economic state right now and where it was four months ago. So if Bernanke thinks that economic conditions could warrant further action, he’s wasted several months of inaction, at great cost to the nation’s unemployed.
In fact, Bernanke says pretty forthrightly that whatever the Fed has done, it hasn’t been enough:
Notwithstanding these positive signs, the economic situation is obviously far from satisfactory. The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value, and other indicators–such as the labor force participation rate and the number of people working part time for economic reasons–confirm that labor force utilization remains at very low levels. Further, the rate of improvement in the labor market has been painfully slow. I have noted on other occasions that the declines in unemployment we have seen would likely continue only if economic growth picked up to a rate above its longer-term trend.28 In fact, growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January. Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.
Bernanke blames housing policy (which he has the ability to influence through buying up mortgages), the headwinds of fiscal policy at the federal and state levels (which he has the ability to influence by entering the municipal bond market and saving tens of billions in financing costs) and “stresses in the credit and financial markets (which he had the ability to influence by more aggressive policy taking down the zombie banks). The nontraditional means that would have ameliorated the crisis, however, have been off the table. And so has any tolerance of higher inflation.
But the conclusion is the most insulting portion. He said that the policies he employed at the zero lower bound “can be effective,” that the recession would have been worse and recovery slower without them, but that he stands ready to provide “additional policy accommodation as needed.” It’s needed!
Bernanke isn’t wrong that a basket of policies, monetary and fiscal, offer the best chance to overcome headwinds and get to a recovery. But when you give the alternative, when you understand what Bernanke says, that “persistently high levels of unemployment will wreak structural damage on our economy that could last for many years,” and that we’re already THERE, taking the Fed off the playing field is really unconscionable.
…I don’t know what speech the New York Times was looking at.
…It’s entirely possible this was part of the Fed-speak way to gradually move the institution toward further easing. But even if so, what was defended, and what will be pursued, are the same inadequate steps. To do more would admit failure on the past steps.