How Much of a Dove Is Bernanke, Really?

Ben S. Bernanke listens during a Joint Economic Committee hearing in Washington on May 22 Photograph by Andrew Harrer/Bloomberg

Is the Federal Reserve doing too much to stimulate the economy, or not enough? Many of the questions that Chairman Ben Bernanke got in today’s congressional testimony were about the risks of the Fed’s doing too much: overdoing easy monetary policy and thus penalizing savers, or inflating fresh bubbles in asset markets.

An equally valid question is whether the Fed is pushing hard enough, given that the U.S. economy is growing more slowly than the Fed wants it to and inflation is running well below its target.

Bernanke is generally perceived as a dove—i.e., someone who worries more about unemployment than inflation—because he is in no hurry to raise short-term interest rates or curtail the Fed’s bond-buying program, which holds down long-term rates.

But it’s hard to see how the term “dove” applies to someone who is standing pat despite failing to achieve the Fed’s own self-imposed targets.

Economists surveyed by Bloomberg predict the economy will grow just 2 percent this year, leaving it far below its potential productive capacity, as the unemployment rate averages 7.6 percent. The economists think the Fed’s preferred measure of inflation (technically, “core PCE”) will be just 1.4 percent this year, vs. a Fed target of 2 percent.

Bernanke isn’t ruling out stronger action. In his testimony he said that depending on incoming data, “we could either raise or lower our pace of purchases.” But raising purchases is clearly not Plan A. As the outlook for the labor market “improves in a real and sustainable way, the committee will reduce the flow of purchases,” the chairman said, without specifying a time.

In a post today on Slate’s MoneyBox blog, Matthew Yglesias noted that Bernanke seemed flummoxed by a question from Senator Amy Klobuchar (D-Minn.), who asked what the Fed would do differently if it had no mandate to reduce unemployment and had to worry only about hitting its inflation target. Bernanke couldn’t name anything. “That’s a huge tell right there,” Yglesias wrote.

Bernanke says for the record that the Fed could do more if necessary, but he is behaving as if he believes monetary policy is at or near its limit. He testified: “Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”

That may be unduly pessimistic. Economists Christina Romer and David Romer of the University of California at Berkeley argue that some of the Fed’s worst mistakes have occurred when the central bank lacked confidence in its ability to make a difference. The title of their article, published in the latest issue of the American Economic Review, says it all: “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter.”

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