Bernanke Says Fed Won’t Kill a Recovery

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.


  1. Sounds like Bernanke spent some time investing in building a consensus within the FOMC (apparently no longer public enemy number 1) for the move. Buy in is nice to have in these situations, and is likely to make better policy than a knee-jerk action.

    There are good things happening in the US economy. Better export markets, a slowly building momentum for manufacturing in the US. These have the potential to positively rebalance the US economy in a way we haven’t seen in years. I hope policymakers don’t lose sight of that in an effort to improve “employment” by increasing opportunities for Americans to sell cups of coffee, cell phones, and condos to each other.

  2. FOMC isn’t public enemy number one, just the inflation hawk faction. That’s like saying the Supreme Court is the enemy, when obviously there’s a huge difference between Samuel Alito and Ruth Bader Ginsburg. I’m happy that there appears to be consensus for the move, but don’t see anything wrong with close votes. It’s a political body, and the majority should do what they think is right.

    I don’t really see what’s so great about manufacturing, considering it’s increasingly done by robots. Best thing I’ve read about this is here, by Tyler Cowen in the American Interest.

    Nothing wrong with turning into a service economy, provided that the monetary authorities provide enough demand for full employment conditions. It just means we need to try even harder to make productivity gains in the more protected sectors (health care, education) and the non-tradable sectors (service employment, housing). Some of the “structural” problems preventing us from realizing greater productivity gains there are really just political problems – a ridiculous patent system for drugs and protectionism for doctors in health care; lack of merit pay, national curriculum standards and universal pre-K and full day kindergarten in education; protectionist rules against home food prep and mobile vendors in food service, and occupational licensing in the rest of the service sector; and overregulation of density and rampant NIMBYism in the housing sector. There are more of course, but many of the problems with the domestic economy are just political problems. If all of these areas got cheaper and better, that would mean higher real wages and it wouldn’t matter as much that nominal wages haven’t been increasing as fast.

  3. I should have been more clear. I think it is positive that companies that manufacture are doing better, rather than just banks and financial service firms. Broadens the base of the economy from one hot sector.

    Anyone looking to manufacturing or any other sector to rapidly raise working-class incomes is likely to be disappointed. I think that Cowen piece is on the money there.

    All those things you list would be desirable, but today’s competitive social democratic (I’d include the US in that list) countries all have something that brings home the bacon, so to speak. Whether it be highly influential firms in a small country (Finland, Sweden), broad based industrial acumen (Germany), or minerals (Norway)–these countries have staying power at spending more on services. Its not enough to just sell stuff domestically, or at least sometimes it seems that way.

  4. America does great export business and the trade deficit has been narrowing recently as more firms have brought production back to the US. Which brings us back to monetary policy. One surefire way to increase net exports is more aggressive currency devaluation from the Fed.

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