Monday, September 17, 2012

The Fed Is Not The Enemy

With its latest announcement, the Fed has finally shifted focus to its long-neglected other mandate, employment. Riddled throughout the official statement are mentions of labor and employment concerns, such as "Growth in employment has been slow, and the unemployment rate remains elevated." That's the second sentence of the statement, proof that Bernanke wanted to emphasize up-front that he's had enough of the waiting for things to get better.

Further evidence of this new focus is the Fed moderately bumped up its economic forecast for next year, meaning Bernanke could've made the case that conditions were expected to improve and thus no additional QE was needed. However, the Fed did announce more QE is on the way, and lots of it (open-ended).

In my opinion, to some extent Bernanke may have used the continuing unemployment problem as political cover, enabling him to put inflation worries aside and go ahead and act fairly aggressively despite pressure from Republicans to stand down. He also needed to skirt criticism for the Fed doing anything at all with an election just two months away.

I commend Bernanke for not giving in to intimidation by Republicans. You had the likes of Republican Senator Bob Corker of Tennessee say that Bernanke “is beginning to do serious damage to the Fed as an institution.” If anything, the fact that more than a few Republicans are so upset about the Fed's actions has me believing they simply fear it will help to improve things -- heaven forbid! We can't have that!

The Fed's announcement is being characterized as if it's throwing the kitchen sink at the economy, and in many ways that's true. But whereas in the past the Fed has received harsh criticism from the left for not doing enough, I've always felt at least some sympathy for Bernanke's predicament (and wrote about it).

The fact remains the Fed alone cannot solve all the problems of this economy. It needs help from Congress in the form of fiscal stimulus and other spending measures in order to spur hiring and increase demand. This time around is no different from other times in the past as the Fed could never do it alone, with Volcker and Greenspan likewise depending on a more cooperative Congress, both parties working together to get the economy moving again. Also, in the past the Fed could just cut interest rates to boost the economy, but with rates currently at near zero this tool has been rendered useless. All the more reason the Fed needs help!

Republicans have refused to do anything that could improve the economy and Bernanke knows this sad truth all to well. On several occasions, whether it be Q&A or in statements, Bernanke has commented on the impotent Congress, stressing or inferring that the Fed cannot fix what's wrong all by itself, that the help of Congress is needed. To that end if Republicans choose to scold Bernanke, they're being disingenuous (surprise!).

What's ironic is the more the Fed is forced to do on its own, without congressional assistance, the higher the likelihood that some time down the road we may see inflation truly creep higher. Needless to say, Republicans greatly fear inflation given more than a few wealthy donors would be quite annoyed to think that their precious capital may erode in real dollar value. My read is there remains a great deal of slack in the economy which translates into low velocity of money and thus continued low inflation. If wages and prices do begin to finally rise in earnest, the Fed will certainly pick this up well ahead of time and take measures to slow the increase. That said, if not and inflation does shoot up exponentially, in large part the Republicans will be to blame.

Again I remind, the Fed has a dual-mandate, price stability and full employment, and with inflation remaining very low Bernanke realized he could no longer ignore the other much larger problem. To do so would've been willful negligence. But he wasn't alone in understanding the need for action as 11 of the 12 FOMC members voted in favor of the policy measures, further making evident the degree to which the entire Fed brain trust believes our unemployment situation is, as Ben put it, of "grave concern."

1 comment:

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