Ben Bernanke, chairman of the Federal Reserve, delivered on Tuesday a remarkably timid policy statement to Congress. This may reflect a hesitation to front run the FOMC, his policy-making committee, which next meets on August 1st. But the main culprit is probably elsewhere. The Fed increasingly finds itself in a large and deepening policy dilemma.
Mr Bernanke devoted almost the entirety of his written statement to recent economic and financial developments. Though he did not go far enough, he rightly emphasized what is now more than evident in recent data releases, including Monday’s retail sales numbers: America’s already inadequate recovery is weakening in the context of an increasingly synchronized global economic slowdown.
Look for the Fed in the next few weeks to go further in revising down its job, growth and inflation forecasts for 2012. Given the institution’s dual mandate of price stability and maximum employment, this will inevitably raise expectations of additional policy activism.
Having exhausted long ago the effectiveness of traditional monetary policy tools, the Fed has no choice but to consider another mix of unconventional measures – specifically, additional purchases of securities, a lower interest rate on excess reserves, an even more aggressive communication policy, and enhanced access to the discount window.
But, more of the same will not have a durable beneficial impact, especially if other policymakers remain missing in action. Indeed, the advantages of another round of unusual Fed activism are declining while the risk of both collateral damage and unintended consequences is material and growing.
The Fed is stuck in a widening dichotomy between the need for a policy response and an increasingly impotent tool kit. I suspect that Bernanke and his colleagues recognize that their policy effectiveness is waning. Yet, understandably, they are unwilling to stand idle given the paralysis in virtually every other part of the economic policy apparatus.
In the meantime, too many politicians seem willing to maintain the myth that the Fed can lead the domestic economy out of its current malaise. It cannot. The best it can do is slow a de-leveraging that, in the absence of proper growth dynamics, eats away at the traditional resilience and entrepreneurship of the US economy.
Recognising this, Congress should be doing much more to awaken other policymakers from their deep slumber. This requires the type of constructive political interaction that has eluded the US for almost the duration of the current term of congress. And there is little to suggest that this will change any time soon, and certainly not before the November elections.
It should therefore come as no surprise that, in their meeting with Mr Bernanke on Tuesday, members of congress showed little interest in internalizing their need to respond quickly to economic priorities. Instead, they diverted the discussion to other issues that, while topical and important, do little to advance the policy agenda and improve the outlook for hundreds of millions of Americans.
So, was Bernanke’s trip to Congress a complete waste of time? No. Hopefully, members of Congress will take seriously his attempt to humanize the risks associated with an urgent policy challenge – that of America avoiding going over the fiscal cliff.
Citing the Congressional Budget Office, Mr Bernanke noted that Congress’s failure to deal with the full range of programmed and blunt tax increases and expenditure cuts would lead to a “shallow recession” next year and, most importantly, “1 ¼ million fewer jobs … created in 2013.”
Given global connections and Europe’s persistent crisis, even this Mr Bernanke warning may be too sanguine. The last thing the US needs is another blow to an unemployment rate that remains way too high, and that involves a damaging component of long-term joblessness in the context of overly-stretched social safety net.
