Ben Bernanke’s speech to the New York Economic Club on Tuesday has been widely viewed as confirming his dovish intentions for US monetary policy in early 2013. This is justified. The Fed Chairman clearly intended to send out a message that monetary policy would try to support the economy if the fiscal cliff results in a significant tightening in the budgetary stance next year.
While this overall message represents no change in the Fed’s thinking, Mr Bernanke did shift his ground on one very important matter. He now seems to have accepted that the rate of growth in potential GDP has fallen sharply in recent years, which is not something he has emphasised in the past. If he persists with this more pessimistic interpretation of potential GDP growth, it would imply that there is a speed limit on the pace at which the economy can recover in the next few years, and that the Fed might need to tighten policy earlier than previously assumed. Read more