Comments on the Bernanke Press Conference
April 25, 2012
Several useful messages were delivered at the press conference.
One of the biggest downside growth risks still facing the United States is the uncertain degree of fiscal drag that will be felt at the start of next year. If Congress legislates no changes in planned austerity from the spending and tax side, the Fed Chairman bluntly stated that nothing in the Fed’s arsenal of counter-measures could be done to neutralize the fiscal restraint. A recession in 2013 might happen, although he did not explicitly mention that possibility. When asked, however, why the central tendency for GDP growth in 2013 and 2014 of individual member forecasts was lower than those proposed in January, Bernanke said the change could reflect greater worry about U.S. fiscal policy. Bernanke appears to believe, as anyone watching current developments in Europe, that the goal of restoring long-term fiscal sustainability is no more critical than making sure that such is done without endangering short-term economic recovery. Without the second condition, the first one can not be achieved.
Perceived inconsistencies between the individual policy expectations of the 17 FOMC members and the policy guidance statement of the Committee as a whole continues to trouble the public. Several questions from the press sought an explanation for why the statement sticks to the prediction of an exceptionally low federal funds rate through late 2014 when only 4 people indicated that they thought the rate would be 0.25% at the end of that year. For me, both views can be true. First, late 2014 implies any time in the fourth quarter of that year, that is before the final two policy meetings of the year which are held in the second half of the quarter. If the fed funds rate is raised at the penultimate meeting of 2014, it almost certainly will be hiked as well at the final meeting of the year. Once normalization began in mid-2004 from a base of 1.0%, the Fed acted at each of 17 consecutive meetings. It raised rates by 25 basis points each time, and 20-20 hindsight strongly suggests that the pace of only 25 basis points each 6-7 weeks was too slow and allowed costly market bubbles to develop. I believe the Fed will raise rates by 75-100 basis points over the first two meetings starting with its first hike of any size, and that means that the first rise of the fed funds target could be in late 2014 (that is after September) and the rate could wind up as high as 0.75 – 1.25% by the end of the year. Nine of the 17 policymakers, a majority, personally projected 1.0% or less at end-2014, so the two sets of forecasts are not inconsistent. Moreover, the Fed will probably take other steps to throttle back policy stimulus before moving the fed funds target, so the rate guidance is not inconsistent either with some sort of tightening occurring before mid-2014 or even in late 2013.
Late in the press conference, Bernanke opined that the slow pace of improvement in the unemployment rate has been his greatest frustration as a monetary policymaker. It’s almost May 2012, just shy of the third anniversary of the current economic recovery, and the jobless rate of 8.2% still exceeds its long-run ceiling of 6.0% by over two percentage points. The U.S. jobless rate at comparable points in prior economic recoveries was 5.5% in October 2004, 6.6% in February 1994, 7.1% in October 1985, and 6.3% in February 1978. Bernanke’s main frustration is a failure to meet one of his two mandates, even as the other mandate of price stability is expected to be missed in 2012-14 at most only marginally and then by being too low. The case for continuing aggressive monetary accommodation remains very powerful and without much penalty if officials are perhaps understating the strength of future recovery to some degree.
Bernanke distinguished the current U.S. situation from Japan’s in the late 1990s in two ways. First, the U.S. isn’t experiencing price deflation. Secondly, the Fed was quick to employ non-interest rate-centric means to stimulate monetary policy after nominal rates approached zero. The Bank of Japan delayed doing that for much longer than the Fed did. The Fed Chairman had clearly prepared his answer and revealed a sensitivity to unfair criticism that his views now are different from what he espoused 15 years ago. It’s got to be incredibly frustrating on a personal level to be assailed by critics in the press and congress who themselves possess insufficient credentials to judge a true expert in the field. It’s akin to the young Ron Paul, an obstetrician by training, being told by an economist that he doesn’t know the basics about how to deliver babies.
Fed policy was second-guessed at the press conference for not providing enough stimulus as well as for disregarding inflation that has lately been higher than anticipated. To the complaint of not doing more, Bernanke reiterated the view that the size of the central balance sheet, rather than incremental changes in such, are the main policy driver. Having ballooned the balance sheet, policy would remain very stimulative even if the balance sheet doesn’t keep rising, and the guidance that balance sheet will not be cut anytime soon is itself a form of continuing stimulus. Moreover, various policy options beyond June, including a possible QE3, remain on the table. In light of Euroland’s debt and growth crisis, it is no small accomplishment that the dollar, one channel for monetary policy to affect real economic activity, has failed to appreciate this year. That’s not just a mere piece of luck. By running a loose monetary policy, it has been the explicit hope of Fed officials that the dollar retain a soft tone, and from the respect of a softer dollar than comparative economic fundamentals ought to have produced, U.S. monetary policy has become more accommodative than a few months ago.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bernanke, Federal Reserve policy, FOMC
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