Ben Bernanke’s Commitment Issues
In case anyone was still wondering, Federal Reserve Chairman Ben Bernanke made one thing abundantly clear in his closely watched speech in Jackson Hole today: In contrast to what the media often say, the central bank has not promised to maintain near-zero interest rates through 2014 to support the economic recovery.
Therein lies an opportunity.
Bernanke reiterated that the Fed, given its current outlook for the economy, expects to keep its target short-term interest rate exceptionally low through late 2014. He stressed that "this guidance is not an unconditional promise." Rather, it's what economists call "outlook guidance." The Fed reserves the right to take away the stimulus before late 2014 if its outlook for the economy improves.
Bernanke said the guidance may have helped communicate "how forceful" the Fed intends to be in supporting the recovery. But its impact is limited by its noncommittal nature. Businesses are much less likely to go out and invest in hiring new employees and launching new products if they think the Fed might change its mind and take away the punchbowl when the party is just getting started.
Some influential economists -- including Bloomberg View columnists Justin Wolfers and Betsey Stevenson and, to some extent, Columbia University's Michael Woodford, who is also scheduled to speak today at Jackson Hole -- have suggested that the Fed could have a lot more impact by going one step further: Make an unconditional promise to keep rates low for a certain period, even if the economy recovers. To be sure, such a commitment would tie the Fed's hands if the economy improved and inflation started to rise. In the current environment, that seems a much less troubling outcome than the possibility that long-term unemployment will permanently impair the economy's ability to grow.
So far, the conversation about further stimulus has focused largely on whether the Fed might embark on a third round of the bond-buying known as quantitative easing. Perhaps the central bank's commitment issues deserve more attention.
(Mark Whitehouse is a member of the Bloomberg View editorial board. Follow him on Twitter.)