ECONOMIC INTELLIGENCE

What Ben Bernanke Said

By CHAD STONE
July 19, 2013 RSS Feed Print

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Chairman of the Federal Reserve Ben Bernanketestifies before the House Financial Services Committee on Capitol Hill in Washington, Wednesday, July 17, 2013.

As his testimony before the House and Senate banking committees this week shows, Federal Reserve Chairman Ben Bernanke takes a very different approach to explaining the Fed's actions to Congress and the public than his predecessor, Alan Greenspan. In contrast to Greenspan's famous purposeful obfuscation, Bernanke tries to be as straightforward and informative as possible about how the Fed is thinking about monetary policy. But that hasn't been as easy as he might have hoped. That's mainly because the Bernanke Fed has been sailing in uncharted monetary policy waters since it effectively pushed short-term interest rates it's standard tool for influencing economic activity to near zero in late 2008. Since then, the Fed has resorted to unconventional monetary policy tools to try to boost the sluggish economic recovery. These policies have included purchases of longermaturity financial assets, known as quantitative easing (QE), and "forward guidance" about the path of the Fed's target for short-term interest rates.

[Read the U.S. News debate: Has the Federal Reserve Overstepped its Mandate?] In the Greenspan era, the only thing people were trying to understand was whether the Fed would raise, lower, or keep its short-run interest rate target the same. In Maestro Greenspan's Delphic comments, he seldom meant to be illuminating. Now, Chairman Bernanke wants to explain in considerable detail that 1) the Fed is getting ready to begin tapering off its QE asset purchases (as long as labor markets continue to improve at a satisfactory pace); but 2) that doesn't mean that the Fed will start selling the assets it has acquired under QE or start raising its target for short-term interest rates anytime soon (unless inflation shows signs of rising too much). Maybe that's TMI and, if so, Bernanke would have done better just to focus on the big picture. That starts with the Fed's dual mandate to foster maximum employment and stable prices. As the chart below shows, it's missing both targets. The Fed interprets maximum employment as "the longer run normal rate of unemployment," which the Fed estimates is in the 5.2 to 6.0 percent range (the Congressional Budget Office has a similar "high-employment" unemployment rate estimate). It has adopted a target of 2 percent per year for inflation.

Here's the essential Bernanke message: Unemployment is too high and the risk of inflation is minimal: [T]he jobs situation is far from satisfactory, as the unemployment rate remains well above its longerrun normal level, and rates of underemployment and long-term unemployment are still much too high. Meanwhile, consumer price inflation has been running below the Committee's longer-run objective of 2 percent. [See a collection of political cartoons on the budget and deficit.] Therefore, the Fed intends to keep its foot on the accelerator:

With unemployment still high and declining only gradually, and with inflation running below [our] longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future. That's especially important, because too many lawmakers seem inclined to keep stomping on the fiscal policy brakes: [T]he risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery. Monetary policy has been the only game in town to support the recovery since the stimulus from the 2009 Recovery Act peaked in 2010. Bernanke has communicated pretty strongly that the Fed isn't contemplating a more expansionary policy at this point; but, to my mind, he's also clearly communicating that any Fed move to taper QE purchases is a far cry from moving toward a major tightening. Thank goodness.