As Bernanke Pushes on Economy, Congress Pulls
I'll say one thing about Federal Reserve Chairman Ben S. Bernanke. He's stubborn and determined. Okay, that was two things.
Despite a barrage of criticism from conservative academics, economists and Republicans, Bernanke has kept interest rates near zero and doggedly pursued a policy of quantitative easing, in which the Fed prints money to buy Treasury securities and mortgage bonds. Today, to almost no one's surprise, the Federal Open Market Committee agreed to continue with $85 billion a month in bond buying.
But Bernanke went further and got the FOMC to adopt numerical thresholds to guide its policy. This is a historical first.
The Fed's statement says that, so long as unemployment is above 6.5 percent, and inflation projections remain below 2.5 percent, quantitative easing will continue. Numerical thresholds increase transparency and help the Fed communicate its policy loud and clear. Markets can count on the Fed not to abruptly change course, unless those targets are breached. Investors and corporate executives also can take comfort knowing that a sudden policy reversal won't upset their long-term plans.
The statement says the committee "will keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
The one problem is that, even as Bernanke maintains the Fed's efforts to kickstart the economy, Republicans in Congress are looking for immediate cuts in government spending in the fiscal-cliff negotiations. They are likely to get at least some of what they demand as the price President Barack Obama must pay to let the Bush tax cuts expire on the top 2 percent or earners and to protect Medicare and Social Security users from benefit cuts.
The upshot is that, as the Fed does monetary easing, Congress is working at cross-purposes by pursuing fiscal tightening. It creates a counter-productive, push me-pull you dynamic.
The central bank, however, won't be deterred. Minutes of past meetings show that some Fed officials are worried that more bond buying could make the central bank’s balance sheet so unwieldy that it won't be able to tighten policy when prices do start to rise again. But Bernanke and his allies appear to have tamped down those concerns, arguing that the Fed must do all in its power to help the labor market and the overall economy. Even the recent pickup in economic activity isn't holding Bernanke back.
Moreover, dire warnings that inflation will come roaring back have turned out to be flat wrong. Consumer prices, as measured by the Fed's preferred index, were up only 1.7 percent in October from a year earlier.
As Bloomberg news reports today, the bond market is on Bernanke's side, as well. Debt traders anticipate prices will rise at the Fed's target rate of about 2 percent a year over the next five years. Indeed, there's almost no market anxiety about quantitative easing. Such confidence in Bernanke's ability to keep inflation in check bolstered his case for more bond buying and numerical targets.
Bernanke deserves to say "I told you so" to the inflation hawks.