“With unemployment still high and declining only gradually, and with inflation running below the Committee’s longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future.”
That’s Fed chair Ben Bernanke today speaking to the House about Fed policy and the economy. His key points were:
–The economy is getting better, but the labor market is lagging well behind and still needs support. He, for one, will keep supporting it until it’s clear that pulling back is warranted.
–Congress is one a main reasons why the Fed must continue its accommodations. He mentioned “fiscal headwinds” numerous times. In fact, his first sentence after “hello” was this: “The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy” [my bold]. That’s like if your neighbor invited you over for a drink and after saying “hi” you pointed out that their neglect of their yard was lowering the neighborhood’s home values.
–Reducing monetary stimulus will be heavily data driven. Right now, as the quote above stresses, the two key measures of economic are both signaling that stimulus is still needed.
–In that regard, Bernanke’s distinction between thresholds and triggers, with the former less binding, is important. I quote the following at length because it’s so logical and well said. And remember, he’s saying this stuff in the House of Representatives, where logic has been on an extended vacation.
The Committee anticipates that its current exceptionally low target range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent and inflation and inflation expectations remain well behaved in the sense described in the FOMC’s statement.
As I have observed on several occasions, the phrase “at least as long as” is a key component of the policy rate guidance. These words indicate that the specific numbers for unemployment and inflation in the guidance are thresholds, not triggers. Reaching one of the thresholds would not automatically result in an increase in the federal funds rate target; rather, it would lead the Committee to consider whether the outlook for the labor market, inflation, and the broader economy justified such an increase. For example, if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the Committee would be unlikely to view a decline in unemployment to 6-1/2 percent as a sufficient reason to raise its target for the federal funds rate. Likewise, the Committee would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective. Moreover, so long as the economy remains short of maximum employment, inflation remains near our longer-run objective, and inflation expectations remain well anchored, increases in the target for the federal funds rate, once they begin, are likely to be gradual.