Contrast the plans of Congress to give up on job creation and move expeditiously to deficit reduction with the plans of the Federal Reserve to belatedly but nonetheless insistently and with near-unanimous participation engage in the monetary tools at their disposal to boost the economy and lower unemployment. There are serious questions about the beneficiaries of QE3 – banks look to be one winner – and I don’t think they are being terribly imaginative in their effort. But this speech by Ben Bernanke in Indianapolis yesterday did make a couple salient points that show that he understands the nature of the problem to some degree.
First, here’s how Bernanke explains the “communications channel.”
In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn’t mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve’s commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend.
He’s saying that interest rates will be low enough for a certain period, even if the economy improves, so people can make their purchasing decisions accordingly, without having to wait to figure out when the Fed will take away the punch bowl. That could definitely have economic implications, especially with interest rates this low. And, it implicitly acknowledges, as he says later, that “the economy is not making full use of its resources” and that monetary policy can alleviate that.
Next, Bernanke dispelled a number of myths about fiscal and monetary policy. He said that he does not keep interest rates low to induce Congressional borrowing, nor does he keep those rates higher to induce austerity budgeting. “Using monetary policy to try to influence the political debate on the budget would be highly inappropriate,” he said specifically, which is the exact opposite of what, say, the European Central Bank is doing, resisting a purchase of sovereign debt until the affected countries submit to “conditions.”
In fact, Bernanke said that the deficit, the main preoccupation in Washington, is a long-term issue and not one we face immediately. In particular, Bernanke said, “They (Congress) must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term.” That’s obviously not spectacular, but it’s an improvement over some past rhetoric, and certainly over the “sky is falling” talk we normally hear in Washington. Further, Bernanke said of the fiscal slope that, in the event of Congressional action, “According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession.” As the fiscal slope is basically an immediate deficit reduction program, it shows Bernanke as an anti-austerity figure in Washington.
Obviously I don’t agree with every piece of this speech – Bernanke lauded the new transparency he brought to the Fed as a way to rebut the desire for an audit of the institution – but on the economics, it’s pretty good.