Same Old Bad News, But No New News From Bernanke
Photo of Ben Bernanke Feb. 9, 2011 by Peter Larson/Medill News Service via Flickr user Medill DC via Creative Commons.
Fed Chairman Ben Bernanke’s breathlessly anticipated speech in Jackson Hole, Wyo. Friday morning was, in essence, a rehash of the hash that is the U.S. economy: unemployment historically high, even productivity revised downward. (As Bernanke put it: “new data have reduced estimates of overall productivity improvement in recent years.”)
And economic growth? Negligible to nil.
“From the latest comprehensive revisions to the national accounts as well as the most recent estimates of growth in the first half of this year, we have learned that the recession was even deeper and the recovery even weaker than we had thought; indeed, aggregate output in the United States still has not returned to the level that it attained before the crisis.”
A Bloomberg post elaborated: “Less than two hours before Bernanke’s speech, the government reported that the economy expanded at a 1 percent annual rate in the second quarter, compared with an initial estimate of 1.3 percent growth. The reduction reflected a smaller increase in inventories and fewer exports.”
How about the housing market, Chairman Bernanke? A predictably glum response here too.
“[T]he recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis. These two features of the downturn, individually and in combination, have acted to slow the natural recovery process.”
As a result of all this, the Fed’s decision-making Open Market Committee “has marked down its outlook for the likely pace of growth over coming quarters. With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.”
Now at this point in his speech, most everyone reading the draft issued at 10 a.m. ET must have been getting as impatient as I was. Yes, yes, we know all this. What are you going to do about it? Here’s the long-awaited answer:
> “In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”
Ah. “The Committee will continue to assess.” That is to say: no news today. No announcement that the Fed will use any of the tools to which the Chairman alludes. No hint that “Helicopter Ben” will create new money and, in effect, drizzle it from on high to provide the economy with new “liquidity” (i.e., cash) and create the “virtuous circle of rising incomes and profits” which he mentions elsewhere in the speech.
Or, as Bloomberg puts it in its current top headline: “Bernanke Doesn’t Signal More Stimulus.”
You can read the speech yourself here. I’ve tacked on a few of the more significant (or less insignificant) passages below for those in a hurry.
So, finally, what to make of this morning’s non-event?
Well for one thing, Paul Krugman called it. In his New York Times column, written before the speech obviously, Krugman writes:
“I’ll be shocked if Mr. Bernanke proposes anything significant — that is, anything likely to make any serious dent in unemployment or offer any serious boost to growth. Why don’t I expect much from Mr. Bernanke? In two words: Rick Perry….
Mr. Perry’s declaration that any further monetary easing before the 2012 election would be ‘almost treasonous,’ and that if Mr. Bernanke went ahead and did it, ‘we would treat him pretty ugly down in Texas.'”
In fact, writes Krugman, in 2000, in a speech about Japan, Bernanke mentioned various central bank options:
“[P]urchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, ‘setting a target in the 3-4% range for inflation, to be maintained for a number of years,’ which would encourage borrowing and discourage people from hoarding cash; and ‘an attempt to achieve substantial depreciation of the yen,’ that is, to reduce the yen’s value in terms of other currencies.”
As Jeannine Aversa and Scott Lanman point out on the Bloomberg website this morning, the current version of what Bernanke calls the Fed’s “tools” might also include one we’ve often emphasized when discussing the Fed in recent years: cutting or eliminating its IOER: “interest on excess reserves.” You see, the nation’s banks have some $1.6 trillion dollars on deposit with the Fed. That’s almost as much as the roughly $2 trillion the Fed has created since the crisis via so-called “quantitative easing” so deprecated by Governor Perry, among many others — $1.6 trillion not loaned out to businesses or individuals, but deposited back with the Fed because of a guaranteed, if low, interest rate.
As Bloomberg’s Aversa and Lanman put it: “Besides buying government bonds, the Fed could cut the 0.25 percent interest rate it pays bank on the $1.6 trillion in excess reserves parked at the Fed.”
They go on:
“It also could replace shorter-term securities with longer maturities, which may help lower interest rates on mortgages and other long-term debt. The Fed also could pledge to keep its balance sheet near a record high of $2.86 trillion for an “extended period” or for a specific time period.”
But, as Krugman writes:
“Just imagine the reaction if the Fed were to act on the other and arguably more important parts of that Bernanke 2000 agenda, targeting a higher rate of inflation and welcoming a weaker dollar. With prominent Republicans like Representative Paul Ryan already denouncing policies that allegedly ‘debase the dollar,’ a political firestorm would be guaranteed.”
Krugman’s bottom line?
“Back in 2000, Mr. Bernanke accused the Bank of Japan of suffering from ‘self-induced paralysis'; well, now the Fed is suffering from externally induced paralysis. In effect, it has been politically intimidated into standing by while the economy stagnates. And that’s a very, very bad thing.”
Or is it? In the immediate wake of Chairman Bernanke’s non-remarks, U.S. stock markets are up substantially from their pre-speech lows, European markets have halved their considerable losses and the dollar is stable. No political firestorm. No market paroxysms. I’m guessing Chairman Bernanke feels he’s already put in a good day’s work. And as I write, it’s barely noon, even out in Jackson Hole.
Excerpts from Bernanke’s speech:
Good, proactive housing policies could help speed that process. Financial markets and institutions have already made considerable progress toward normalization, and I anticipate that the financial sector will continue to adapt to ongoing reforms while still performing its vital intermediation functions…
The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability. Low and stable inflation improves the functioning of markets, making them more effective at allocating resources; and it allows households and businesses to plan for the future without having to be unduly concerned with unpredictable movements in the general level of prices….
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view–the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.
Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank….
Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives….
Economic policymakers face a range of difficult decisions, relating to both the short-run and long-run challenges we face. I have no doubt, however, that those challenges can be met, and that the fundamental strengths of our economy will ultimately reassert themselves. The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.