Can Bernanke Explain the Difference Between Easy Money and Easier Money?
Conventional wisdom: Federal Reserve Chairman Ben Bernanke is saving all of his new, interesting things to say for his question-and-answer session with the House Financial Services Committee.
Truth: In his testimony released this morning, there was actually a fresh discussion of how the Fed distinguishes its two easy-money tools -- buying bonds and low interest rates.
"Within our overall policy framework, we think of these two tools as having somewhat different roles," Bernanke said. The Fed is buying bonds to "increase the near-term momentum of the economy," with special attention to unemployment.
Low rates now and promises they'll stay that way for the "forseeable future" make a longer-term play. Their job is to give "a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels."
Bond purchases are there to give the economy a growth jolt, Bernanke is saying. Low interest rates will remain until it's clear the boost is sustained.
The division matters because as the Fed has explained its plan to "taper" its monthly purchases of Treasury and mortgage securities, financial markets rushed to anticipate interest-rate hikes. Bernanke is explaining for the first time why the two won't go hand-in-hand.
The combination of a quicker taper along with reassurances of slow rate hikes means a longer time at the zero lower bound. That's a strange choice. The Fed launched its purchases because it wanted a recovery fast enough to escape zero sooner. Now it's saying it prefers zero to accelerating the recovery with purchases. Why?
Fed officials, to be sure, still struggle to explain the exit strategy. What still confuses markets is just how conditional the Fed's promise of easy money is.
On the one hand, the Fed has promised to keep rates low until long after the recovery has become robust. On the other, its past language on tapering has suggested it will cut purchases for every bit the economy improves.
In his statement, Bernanke injected his unconditional rhetoric into tapering: "We intend to continue our purchases until a substantial improvement in the labor market outlook has been realized."
That's a dovish change, on the margin. And it's a dovish statement. Even if the House can't get its microphones to work, the Fed is speaking with a clearer voice.
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