Federal Reserve Chairman Ben S. Bernanke should assure investors next week that “he’ll do whatever it takes” to stimulate the slowing economy, said Vincent Reinhart, chief U.S. economist at Morgan Stanley.
Bernanke should use his Aug. 31 speech at the Fed symposium in Jackson Hole, Wyoming, to expand his commitment to providing additional accommodation if needed because the central bank is falling short of its mission, Reinhart said in an interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen.
“The Federal Reserve should provide a conditional commitment that says as long as it is short of its goals it is willing to expand its balance sheet,” Reinhart, a former head of the Fed board’s Division of Monetary Affairs, said today. “What you want to be is conditional, you want to be able to say as long as the economy is not performing relative to what the Congress told you to do, you’ll continue to act.”
The Fed chief should say he recognizes that “the Federal Reserve is failing in both of its goals, maximum employment and stable prices, and that we’ll have an open-ended commitment to expand the balance sheet,” Reinhart said.
Economic growth decelerated to 1.5 percent in the second quarter from 2 percent in the first quarter. That hasn’t been fast enough to reduce a jobless rate that climbed to 8.3 percent in July, the same level where it was in January, and has been higher than 8 percent since February 2009. The next Federal Open Market Committee meeting is Sept. 12-13.
“I actually don’t think they’ll do much” at the FOMC meeting, Reinhart said. “At best in September they’ll probably tweak the interest-rate language and they’re going to keep the balance sheet on hold until December.”
Growth will probably be about 1.75 percent for the next year, Reinhart said. Economists forecast gross domestic product will increase by 2.2 percent this year, the median of 78 estimates in a Bloomberg survey this month.
“After a severe financial crisis, you have significant headwinds,” Reinhart said. “The U.S. economy is stuck in a growth channel at 2 percent. Sometimes we’re at the low end of the channel, sometimes we’re at the high end. Now we’re at the low end.”