Ben Bernanke's Big Bet: As Economy Cools, Fed Chairman Stands Pat
Who knows? That, in essence, was Ben Bernanke's response today in his press conference when asked why the U.S. economy is stalling. Said the Federal Reserve chief:
Part of the slowdown is temporary, part of it may be longer lasting. We don't have a precise read on why this slower pace of growth is persisting.An imprecise read would do, Mr. Chairman. Such remarks don't suggest candor so much as a reluctance to acknowledge what is increasingly clear -- the economy is in trouble. Slow growth isn't only "persisting," it's slowing even more. Fed officials cut their forecast for economic growth this year to a range of 2.7-2.9 percent, down from their April projection of 3.1-3.3 percent. For 2012, growth is pegged at 3.3-3.7 percent, down from 3.5-4.2 percent. Longer-run growth estimates were unchanged, but these are always a shot in the dark.
The jobs picture is also dimming. The Fed's policy board now expects the unemployment rate to remain as high as 9.1 percent through 2011, a bleaker outlook than in April. Bernanke sought to administer the usual gloss by saying the labor market is improving. But the downturn forced him to concede that slowing growth may be "due to factors which are longer-lived and which will be still operative by next year."
And if the economy continues to fade, next year may be too late for the Fed to prevent a double-dip recession. Writes economist Mark Thoma over at CBS MoneyWatch:
I think it's a mistake for the Fed to look past the current slowdown in the recovery (it should ask itself how often it has had to downgrade its forecasts in the past). This is a critical point in the recovery, and if the Fed makes the wrong choice, it could make things worse than they need to be.Standing still
Is there anything the Fed can do to turn things around? As expected, it pledged to maintain short-term interest rates near zero for an "extended period," which means until economic conditions dictate otherwise. Bernanke also rejected a third round of quantitative easing for fear of aggravating inflation.
Yet there are other options, such as "inflation targeting," a policy the chairman is said to favor that would give the bank more room to keep interest rates low without triggering inflation. Or he could be especially bold and signal a willingness to accept a rise in inflation in exchange for a decline in unemployment.
Instead, the Fed is waiting for... your guess is as good as mine. Bernanke acknowledged the bank has other levers it can pull to stimulate growth, but cautioned that such methods are untested. Well, OK. But with the economy deteriorating, a historian's fidelity to past measures is useless unless that produces results here in the present. Says Andy Kroll of Mother Jones:
Apart from sticking with rock-bottom interest rates, the Fed is turning to a hope-and-wait strategy if economic growth, job creation and consumer spending pick up in the coming months. Thanks a lot, Ben Bernanke.For now, at least, the economy isn't in free-fall. But it is suspended in a very dangerous place. The Fed's passivity raises questions not only about its ability, but also its willingness to do what is necessary to keep the economy from taking a dive.
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