Dec 13, 2012 at 1:29 pm
To his great credit, Federal Reserve chair Ben Bernanke continues, as Neil Irwin put it this AM, to push the bounds of monetary policy. I won’t go through the deets—read all about it in this morning’s papers—but the gist is twofold:
–On its interest rate policy, the Fed moved from date-targeting to indicator-targeting. That is, instead of saying “we’ll keep interest rates really low until [date]” they’re now saying they’ll hold rates around zero until either the job market improves to the point where unemployment falls to 6.5% or expected inflation goes above 2.5%.
–The Fed will continue its “quantitative easing” measures, actually ramping them up a bit. They’ll continue to spend $85 billion a month on bonds to put downward pressure on longer term interest rates, including mortgage rates. But instead of the “twist” where they just shift from shorter to longer term bonds, thus holding the size of their balance sheet constant, they’ll buy the new bonds with new money, further expanding their balance sheet.
–Given that this is pretty much what they’ve been doing, both on rates and QE, this is not a huge deal for current growth prospects. In fact, their new forecast has unemployment around the mid-7’s next year and around 7% in 2014 (and their forecasts have continuously been too optimistic). Just think for a second about how long this labor market has been so slack, and remember, it’s the job market, not the stock market, that matters most for most working families’ day-to-day living standards.
[Data note: I probably wouldn’t have chosen unemployment as my key indicator of slack, since it can be artificially lowered by declining labor force participation, like the fall last month from 7.9% to 7.7%. Other indicators, like nominal GDP growth or the output gap between actual and potential GDP, or maybe even the employment rate, would have been better choices, IMHO. On the other hand, a) unemployment is well known, well understood, and closely watched, and b) they said they’ll look at the labor force rate and other stuff too, so probably not a big deal.]
–But the move does show that Ben’s Fed continues to worry more than any other economic policymakers about the near-term weakness in the economy. As I’ve always stressed, however, they can’t do it alone. Low interest rates are of course essential at a time like this, creating the incentive for business, households, and yes, governments, to borrow cheaply and invest (and refi), generating needed economic activity. But low rates by themselves can’t do it all, as Ben continuously stresses. Absent more demand from complementary fiscal policy, too many of the loanable funds are left on the table.
–And of course, it doesn’t help that DC is threatening to derail the whole thing anyway with a fiscal cliff fiasco followed by a debt ceiling debacle.
–Finally, and this is the main point that I haven’t seen in all the articles about this: why is it that the one person/public institution that’s bringing real grown-up concern and action to the current economy and the plight of the people in it is an unelected body? How we really devolved to the point where so many of our elected officials are so enthralled to vested interests that their jobs are no longer to serve the vast majority of us who depend on a tight job market? Instead, to keep the bucks rolling in, they choose to serve Grover, the Kochs et al, lobbying for tax cuts, corporate breaks, less regulation, and so on, leaving it to a dwindling band of the truly concerned and Fed Reserve technocrats to worry about jobs, wages, middle class incomes and poverty.
So, I’m glad Ben is standing tall, doing his best to keep the focus on growth and jobs. But the fact that he’s virtually alone in that pursuit is what’s so disturbing.
Update: Just saw this piece by Bloomberg’s David Lynch this AM amplifying many of the above points re misguided policy focus, though I wouldn’t blame the President so much–he and his team have continued pushing the jobs agenda from the Sept 2011 American Jobs Act to stimulus measures they’ve introduced in the cliff debate (and, from what I hear, they’re holding firm on those meaures in the negotiations).
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