There really weren’t that many surprise from the Fed today, but for some reason today’s FOMC events landed like a hand grenade.
You can probably credit Paul Krugman for this. His NYT Magazine piece, claiming that Bernanke had been assimilated into the Fed borg, causing him to forget everything he preached when he was academic dropped with perfect timing.
Specifically, Krugman’s argument, is that Bernanke of 15 years ago advocated WAY more easing than what Bernanke is doing now, and that Bernanke of today is just an institution-man who doesn’t want to rock the boat.
The timing of Krugman’s article was almost certainly intentional, and it seems to have inspired the most explosve of question of the whole thing.
We’re copying this section of the transcript from Mike Konczal, but the basic gist is that the NYT’s Binyamin Appelbaum asked Bernanke to respond to the Krugman article:
Binyamin Appelbaum: Unemployment is too high and you said you expect it to remain too high for years to come, inflation is under control and you expect it to remain under control. You said you have additional tools available for you to use, but you’re not using them right now. Under these circumstances, it’s really hard for a lot of people to understand why you are not using those tools right now. Could you address that? And specifically, could you address whether your current views are inconsistent with the views on that subject you held as an academic.
Ben Bernanke: Yeah, let me tackle that second part first. So there’s this, uh, view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time. To the Bank of Japan, the first was that I believe a determined central bank could, and should, work to eliminate deflation, that it’s falling prices. The second point that I made was that, um, when short-term interest rates hit zero, the tools of a central bank are no longer, are not exhausted there, are still other things that, um, that the central bank can do to create additional accommodation.
Now looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a moderate risk in late 2010, we used additional balance sheet tools to return inflation close to the 2% target. Likewise, we’ve been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the, the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that, Japan was in deflation and clearly, when you’re in deflation and in recession, then both sides of your mandate, so to speak, are demanding additional deflation.
Why don’t we do more? I would reiterate, we’re doing a great deal of policies extraordinarily accommodative. You know all the things we’ve done to try to provide support to the economy. I guess the, uh, the question is, um, does it make sense to actively seek a higher inflation rate in order to, uh, achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very, uh, uh, reckless. We have, uh, we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable, in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a, [indiscernible] expectations or destabilization of inflation. To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do.
Anyway, Paul Krugman was definitely NOT impressed by this answer. In fact, he seems to have taken it as vindication of his view that Bernanke is now a run-of-the-mill Fed guy, afraid to take risks.
Notice the framing — “a slightly increased pace of reduction in the unemployment rate”. It’s basically an assertion that we’re doing all right, maybe could do a bit better, but not worth endangering the Fed’s reputation — oh, and as long as we don’t have actual deflation, no problem.
Photo: Bloomberg Television
This really gets at the essence of Bernanke’s maddening position: The Fed is clearly failing on the unemployment front, and it would be insane to risk 30 years of “building up credibility.”And it’s here that we really get to one of the most contentious ideas of the day, which is that credilibity is rubbish, and that the Fed needs to do the exact opposite of that. Economist (and former PIMCO guy) Paul McCulley has been pounding the table that in a liquidity trap, Fed policy must be “irresponsible.”
Normally Bernanke would be right to think about inflation and whatnot, but in this depressed state, responsibility and credibility are toxic to recovery.
So we can only assume that McCulley, if he was watching the press conference today, felt the urge to throw up, while watching Bernanke explain that sub-optimal employment was the appropriate wages for credibility maintenance.
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