Bernanke Faces Critics on Both Sides at Jackson Hole
AUGUST 30, 2012By RANDALL W. FORSYTH | MORE ARTICLES BY AUTHOR
QE or not QE? That is the question the financial markets are looking for Federal Reserve Chairman Ben Bernanke to answer in his anxiously awaited speech to the annual confab of policy makers and academics Friday in Jackson Hole, Wyo. But, Hamlet-like, the Fed chief may not provide a simple response.
In part, that is because the central bank is the target of the slings and arrows of the outrageous fortune of being subject to political pressures while in the pursuit of the largely academic question of the course of monetary policy. Both from the political campaign and from within the Fed, the chairman is being criticized
for running an "ultra-easy" policy that threatens future inflation and financial disruptions. From the other side, Bernanke is criticized equally for not following an easy enough policy to reduce unemployment from the current high level.
An outrageous fate indeed, for a policy maker to be criticized at once for having too much and not enough. And, moreover, both sides have their points. Never was there a better time for distinguished academic such as Bernanke to detail what monetary can, and can't, do and what a central bank can do to meet those goals.
His speech comes at a sensitive time, right after the Republican national convention, which endorsed a study of the possible return to the gold standard. Making the dollar as good as gold seems as admirable virtue as patriotism, but a fixing the currency's value in terms of the metal removes the flexibility in monetary policy. That removes the chance of central-bank machinations to debase its currency but also the possibility of expanding liquidity in a crisis.
The U.S. shed the last vestige of the dollar's tie to gold in August 1971 and there is little chance of it returning. But more important than what happens in Tampa, Fla., the site of the Republican convention, may be what was published by the Dallas Fed -- a critique of the unintended consequences of "ultra-easy" monetary policy. Coming from one of the district Reserve Banks whose president, Richard Fisher, has been a leading critic of the Fed's expansionary policy, just before the Bernanke's talk at Jackson Hole on monetary policy, the timing seems something other than random. The confluence with the gathering of the GOP, whose candidate for president, Mitt Romney, has declared his intention, if elected, not to rename Bernanke as Fed chairman, also seems more than coincidental.
So-called quantitative easing consists of the central bank purchasing assets -- almost invariably government securities -- to inject cash into the financial system. As a consequence, governments' borrowings are financed either indirectly in the secondary market (the usual way) or directly by purchases in the primary market. Either way, governments' debts are monetized -- IOUs become money -- allowing the governments to spend beyond their means. The deficits may help sustain current spending but are paid off over a generation, if ever.
Proponents of QE say this is the only way out of a downward spiral that leads to unemployment. Persistent joblessness results in the wasting away of skills. Long-term unemployment has been a particularly insidious feature of the tepid recovery starting in 2009. To be sure, there is a skills mismatch. Those who were in the housing bubble -- from mortgage brokers, real estate agents to tradesmen in construction, from contractors to carpenters and plumbers -- can't readily jump to health care, for instance.This faction -- which includes the presidents of the Reserve Banks of Chicago, Boston and San Francisco -- argue for continued monetary stimulation until the unemployment rate declines decisively, say from the current 8%-plus to below 7%. Such a policy, they say, would be consistent with the Fed's dual mandate of maximum employment along with price stability. After all, the government's numbers show prices rising around the Fed's 2% target. But how easy money can find construction workers new jobs at comparable pay remains a conundrum.
For the near term, however, there is little indication the Fed can do much more than remain supportive to an economy that's plodding along at a 2% growth pace -- far from robust but also far from the contraction seen in Europe and more benign than the deceleration from the numerically higher figures published in China that signify far greater pain. In the U.S., second-quarter gross domestic product was revised up Wednesday, to a seasonally adjusted annual growth rate of 1.7% from the original 1.5% estimate. More importantly, real final sales (GDP less inventory changes) were revised up to a 2% annual growth pace from 1.2%.
That may be as good as it gets -- 2% growth. In six or seven years, unemployment may fall to a rate that we're comfortable with, perhaps 6% or lower. In the meantime, it's hard to see what the Fed can do to create jobs. Short-term interest rates, over which the Fed has direct control, are pegged near zero, and the central bank has stated it plans to keep them there through late 2014. Other borrowing costs -- such as mortgage interest rates or corporate bond yields -- are lower than any time in modern history, also helped by the Fed's so-called Operation Twist. That operation, slated to continue through the end of 2012, involves the purchase of long-dated securities in exchange for shorter ones.
So, what more can Bernanke say at Jackson Hole to clarify what monetary policy can -- and can't -- do? Market participants bet he will discuss additional measures the central bank may take to spur the sluggish economy, as hinted at in the minutes of the August Federal Open Market Committee meeting.
Indeed, risk assets -- such as equities and high-yield bonds -- have been bid higher over the past month on expectations that Bernanke and his counterpart at the European Central Bank will announce measures to inject more liquidity. The Fed chairman is hoped to shed light on whether that is to be, or not to be.
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