Ben Bernanke just wrapped up his press conference.
For the Chairman of the Federal Reserve, it was a magisterial day… probably his best performance since the throes of the financial crisis.
The first breakthrough came with the policy announcement itself at 12:30.
The Fed announced a new round of Quantitative Easing (buying Treasuries in order to force people into riskier assets), but unlike previous rounds, this one is not fixed by some end date.
Instead, the Fed will buy $40 billion worth of Mortgage-Backed Securities every month until the labour market improves substantially.
This is a radical change from previous forms of QE, because the Fed is committing itself to future actions: The easing will continue until morale improves, one might say.
Here Bernanke is doing two things: He’s saying the Fed is specifically focused on fighting unemployment (There’s very little mention of inflation anywhere) and he’s also joining the vanguard of the economics profession, which has an increasingly growing arsenal of datapoints to suggest that promises about future easy policy are more powerful than mere bond purchases.
What makes this announcement particularly surprising, is that past performance from Bernanke seemed pretty crabbed.
At his press conference on August 1, he gave fairly sheepish answers to questions about why the Fed wasn’t doing more, despite the fact that it was falling short of its dual mandate.
After his speech at the Jackson Hole conference on August 31, Felix Salmon described Bernanke as “defensive”, doubling down on the same bond buying ideas that have only had middling effects heretofore.
So already the policy statement marked a strong shift in strategy (focusing on policy contingent on strong economic performance).
<strong>WATCH: What 'Unlimited QE' Means</strong>
Then he followed that up with his best press conference yet.
As we said before the press conference, the #1 question that everyone wanted to ask Bernanke was: What does “substantial” improvement in the labour market mean? If the Fed is saying it will keep money easy until it sees this kind of improvement, and if this commitment is going to have any meaning, then we should be given some kind of idea about what the Fed sees as substantial.
Indeed this was a big question, that was asked in multiple ways by multiple reporters.
Bernanke didn’t have a real concrete answer to this question, but he came pretty close. In response to a question from WSJ’s Jon Hilsenrath he made clear that the last 6 months of job gains weren’t anywhere close to being satisfactory.
In response to a question from NYT’s Binyamin Appelbaum about why the Fed didn’t specify some kind of specific unemployment target, Bernanke replied that that number alone wasn’t satisfactory. After all, last month, the unemployment rate dropped from 8.3% to 8.1%, but much of that was due to declining workforce participation, which is not that the Fed wants to see. And even then, he said the Fed hadn’t “yet” come to a specific number on economic improvements, suggesting that more clarity on the economic goals front could be forthcoming.
Later, when asked by a German reporter a question that was essentially “what about inflation?” Bernanke dismissed it, saying that this was not really an issue and that the economy was not in any danger of overheating.
Essentially, Bernanke has pushed the Fed in a major tilt towards a major focus on the real problem with the economy — unemployment — at a time when there’s major policy pushback to do the opposite.
Bernanke even said something Nominal GDP targeting (the buzziest new idea in monetary economics) in a fairly positive light… a comment that made David Beckworth jump for joy.
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Even Michael Woodford — the economist who gave a critical presentation of Bernanke’s policies at the Jackson Hole conference — gives his thumbs up on the news, although he would still like the Fed to do more.
Besides the actual policy, there are two things that make today’s performance impressive.
The first is that Bernanke actually appears to be changing his mind. Bernanke is essentially admitting that the approach the Fed has tried so far hasn’t really worked, and that a new direction was needed. That’s not an easy thing to do for anyone in any profession, let alone someone presiding over such a depressing economy.
The other impressive thing is that Bernanke has gotten most of the Fed to go along with him. For a while there was some talk about how this Fed was incredibly divided, and that he was a “lonesome dove.”
Well he just took the Fed in a new direction, and only had one dissenter (Jeffrey Lacker, who would dissent ot the opening of an envelope).
So Bravo to Bernanke: Focusing hard on unemployment, trying new ideas, changing his own mind, and getting the Fed to go along with him.
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