Ben Bernanke said last month the economic outlook is “unusually uncertain.”
But when it comes to extolling the benefits of aggressive Fed policy, the same might be said for Bernanke himself.
In Friday’s highly touted speech at the annual Federal Reserve retreat in Jackson Hole, Wyo., Bernanke pledged to do whatever is necessary to keep the economy from stumbling down the Japanese path to a debilitating spiral of falling prices known as deflation.
The Fed chief expressed confidence that he will be able to do so, despite widespread assertions that the Fed is out of bullets.
The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.
Bernanke has long been caricatured as “helicopter Ben,” the central banker chafing to drop newly printed dollars into a sluggish economy to restore normal conditions. Some economists have been pushing him to sketch out a more aggressive stance in the wake of flagging job numbers.
But there was no sign in Friday’s remarks that Bernanke, whose Fed has already purchased more than $1 trillion of government and mortgage-related securities, is racing back to the helipad.
He suggested, not for the first time, that the Fed is inclined to stay on the sidelines unless employment drops sharply or inflation’s decline deepens. What’s more, his comments at Jackson Hole suggest Bernanke isn’t sold on the more aggressive policies many economists have him penciled in for.
Bernanke “now appears willing to discuss all the central bank’s options for introducing further policy stimulus, but he doesn’t seem entirely convinced that they would necessarily be effective,” said Paul Ashworth of Capital Economics in Toronto.
For instance, in sizing up the pros and cons of what has become known as QE2 — for a second round of quantitative easing, or Fed purchases of Treasury securities — Bernanke said this:
One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions. … such purchases seem likely to have their largest effects during periods of economic and financial stress, when markets are less liquid and term premiums are unusually high.
That is to say, asset purchases are useful in driving down interest rates when markets are stressed – not necessarily for goosing a sluggish economy.
That stance won’t make his liberal critics happy. Economist Paul Krugman contends the Fed needs to do more to bolster the economy, come hell or high water.
“Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer,” Krugman wrote.
But Bernanke’s remark echoes one of the central criticisms of the Fed’s decision to hold down interest rates for an extended period of time: that no one can demonstrate that doing so actually helps the economy.
Indeed, skeptics of easy money policies make just the opposite case, saying that ultralow rates ultimately prevent the economy from healing, by propping up firms that would fail in a normal interest rate environment and preventing those resources from being deployed productively elsewhere.
The Fed-induced pressure on interest rates also creates a bubble-like environment that pushes investors to reach for yield, increasing uncertainty among investors.
“QE leaves investors in an awkward spot,” investor David Merkel writes in a recent post on his Aleph Blog. “There are no safe places to place money with any yield. So, you can earn zero, or take risks that seem uneconomic to gain yield.”
This isn’t to say the Fed is on the sidelines for good. Bernanke didn’t rule out more Treasury purchases, the way he seemed to throw a dart at a targeted rise in inflation expectations. So a sustained uptick in unemployment could yet shift the balance toward new Fed stimulus.
But for now, Bernanke has managed to stake out a position likely to exasperate both those who want a more activist Fed and those who dream of eliminating the central bank altogether.
