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Monetary policy

Ben Bernanke Is a Dove Because Congress Isn't

Ben Bernanke Is a Dove Because Congress Isn't

Photograph by Chris Maddaloni/CQ Roll Call/Getty Images

The Federal Reserve chairman said that the economy remains weak so the Fed must maintain “a highly accommodative stance for monetary policy.” That’s from his prepared testimony to the House Financial Services Committee. What he’s too polite to say directly is that the Fed has to be dovish because fiscal policy (which is under the control of Congress) is getting hawkish.

Bernanke has no say over fiscal policy, which is about spending and taxation. The problem is that the much-maligned but nonetheless useful fiscal stimulus enacted by Congress is wearing off too soon, before the U.S. economy has fully recovered. A story this week by Caroline Salas Gage of Bloomberg News quotes a warning that Bernanke gave to the Senate Budget Committee on Feb. 7. Said Bernanke:

“If no action is taken on Jan. 1, 2013, between expiration of tax cuts, sequestration [i.e., automatic spending cuts] and a number of other measures, there will be a very sharp change in the fiscal stance of federal government, which by itself, with no compensating action, would indeed slow the recovery.”

Fiscal policy, far from adding to economic growth, will subtract about 0.4 percentage points from it in 2012 and 0.75 percentage point from it in 2013, according to the median response in the Federal Reserve Bank of New York’s surey of primary dealers in January.

The only thing the Fed controls is monetary policy–interest rates and the money supply. And it’s continued to be extraordinarily generous with the tools it has. So much so that hard-money Republican presidential candidates Mitt Romney, Rick Santorum, and Newt Gingrich have all said they wouldn’t appoint him to another term. (Ron Paul eventually wants to get rid of the Fed entirely, so with him it’s a bit of a moot point.)

Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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