Bernanke Kept Monetary Stimulus Options Open This Afternoon
Fed Chair Ben Bernanke kept monetary stimulus options open this afternoon in his semiannual monetary policy testimony and report before the Senate Banking Committee. Ranking Republican Richard Shelby (R-AL) put the question this way:
SHELBY: Thank you.
Mr. Chairman, the minutes of the June FOMC, the Federal Open Markets Committee, meeting stated, and I'll quote, "The committee would need to consider whether further policy stimulus might become appropriate if the Outlook were to worsen appreciably," end quote.
Aside from taking the federal funds rate and the interest rate paid on reserves to zero, it's not clear to me what further policy stimulus would mean. If further stimulus were to involve more asset purchases that you alluded to by the Fed, would the Fed buy treasuries or would they try to channel credit to specific segments of the financial market, such as housing or perhaps even municipal debt?
BERNANKE: Senator, I think it's important to preface the answer by saying that monetary policy is currently very stimulative, as you, I'm sure, you're aware.
We have brought interest rates down close to zero. We have had a number of programs to stabilize financial markets. We have language which says that we plan to keep rates low for an extended period. And we have purchased more than $1 trillion in securities. So certainly, no one can accuse the Fed of not having been aggressive in trying to support the recovery.
You know, that being said, if the -- if the recovery seems to be faltering, then we would at least need to review our options, and we have not fully done that review, and we need to think about possibilities.
But broadly speaking, there are a number of things that we could consider and look at. One would be further changes or modifications of our language or our framework describing how we intend to change interest rates over time, giving more information about that. That's certainly one approach.
We could lower the interest rate we pay on reserves, which is currently one-fourth of 1 percent.
The third class of things, though, has to do with changes in our balance sheet, and that would involve either not letting securities runoff as they are currently running off, or even making additional purchases.
We have not come to the point where we can tell you precisely what -- what the leading options are. Clearly, each of these options has got drawbacks, potential costs. So we are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have, recognizing that, as I said, the policy is already quite stimulative.
Monetary Options
Of course he kept options open. Options would be needed in the event of another crisis.
What he didn't promise was fixing unemployment.
This is in spite of worries about long term employment:
BERNANKE: More than 40 percent of the unemployed have been out of work six months or longer, nearly double the share of a year ago. I am particularly concerned about that statistic, because long spells of unemployment erode skills and lower the longer-term income and employment prospects of these workers."
The BEST the Fed can deliver is 7 percent through 2012. Anyone who is NOT happy with 7 percent unemployment or shares the worries about long term unemployment needs to look to stimulus spending and a multi-year Federal JOBS project to reduce unemployment.
There is no Monetary Fairy that is going to create JOBs. JOB creation requires vision, planning and a comprehensive labor and industrial policy. This means additional Federal investment and incentives. Unfortunately, our fiscal policy is pulling in the opposite direction by letting states cutback, decreasing demand for goods and services and tossing state workers and teachers out into the streets.
The Fed Chairman also recommended more stimulus:
BERNANKE: "The large deficits, as unattractive as they are, are important for supporting economic activity and they were important also, in restoring financial stability. And so I think they were justified in that respect. And I would be reluctant to withdraw that support too precipitously in the near term."
The Fed cannot do it alone. The Fed will not be successful if fiscal policy is pulling in the opposite direction. Bernanke wants more stimulus help, not less. His statement is about as forceful as it can be without "meddling" in fiscal policy.
Monetary options
I agree, although I'm not sure the Fed can deliver 7% unemployment by 2012. A lot of other things have to go right, like getting through 12 million residential foreclosures, dealing with a mountain of bad commercial real estate loans, getting the states back on their feet, and avoiding negative consequences of foreign debt crises. Also, the Fed has $1.1 trillion of questionable mortgage assets to dispose of, a very delicate operation that would further dampen the economy. We desperately need fiscal policy tightening next year that would take effect starting in 2012.