Money politics used to be something voters took sides on, but Federal Reserve policy has unfortunately come to be seen as something technical and boring in the modern era. That’s too bad because it’s not really that complicated. Think of it like the Supreme Court. Most of the public doesn’t read the Justices’ opinions or engage with the high level debate, but they do take sides on *outcomes* and understand who wins and who loses from a given decision. Voters don’t need to understand how the Fed does what it does to have an opinion on which direction they should go. And that part is really simple! Basically there’s a trade-off between full employment and low inflation, and liberals right now ought to be rooting for Team Full Employment.
The Fed can do more to bring unemployment down, but there comes a point where unemployment can’t go any lower, and then we just get rising prices. Are we there now? No. Are we going to be there soon? No. Right now, inflation is low, and unemployment is high. The Fed has plenty of room to do more to bring unemployment down.
What you need to know about the announcement yesterday is that Ben Bernanke said if we start to see a real recovery, he’s not going to kill it. Lots of people have been hearing Bernanke say that he’ll keep interest rates low because unemployment is high, but have been wondering whether that means he’ll raise rates as soon as the economy starts to improve.
This was confusing, since if you were about to take out a loan for a capital-intensive project, like building an apartment building, you wouldn’t have known if you were going to be able to complete the project at today’s low borrowing costs, or if it was going to get more expensive if the economy started to recover. Today Bernanke clarified that he’s not going to raise interest rates for a while into the recovery, even if it means a little “inflation”, so go ahead and take out that loan for your project.
This is great news for the recovery, and Intrade seems to think that it’s great news for Barack Obama’s reelection prospects:
It is also great news for blogging. Bentley University professor Scott Sumner, who deserves a huge amount of credit for changing the conversation on the Fed, and persuading a growing number of economists and Fed watchers that forward guidance – using the communications channel to tell markets where the Fed wants to go – is a more important tool than the balance sheet. Yesterday’s move wasn’t as big of a break from the path as Scott wants, but this was an important move in the right direction.
For more on why the announcement matters so much, head over to The Economist.