Jon Hilsenrath reports:
Federal Reserve Chairman Ben Bernanke, in a letter responding to questions posed by U.S. Rep. Darrell Issa (R., Calif.), chairman of the House oversight committee, defended actions the Fed has taken to support the economy and said there is room for the Fed to do more.
“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Mr. Bernanke wrote in a letter dated Aug. 22, a copy of which was obtained by The Wall Street Journal.
The Fed’s “Operation Twist” program—buying long-term Treasury bonds and selling short-term securities—is still “working its way through the economic system,” Mr. Bernanke said. The program was first launched in September 2011 and in June 2012 was extended through the end of this year.
Asked by Mr. Issa if it were premature to consider additional monetary moves, Mr. Bernanke said that “because monetary policy actions operate with a lag,” the Fed must make policy “in light of a forecast of the future performance of the economy.”
The Fed chairman also said that the Fed’s bond-buying of recent years has “helped to promote a stronger recovery than otherwise would have occurred, and to forestall the possibility of a slide into deflation…by putting downward pressure on longer-term interest rates and contributing to broader easing in financial conditions.”
I particularly enjoyed learning that “because monetary policy actions operate with a lag…” Because everyone knows the Fed´s forecast of future economic performance has been pretty dreary and also because, contrary to what Bernanke says, monetary policy works with leads! (Note: Stocks turned sharply higher Friday, after Federal Reserve Chairman Ben Bernanke reiterated that there is further room for the central bank to act)
Bernanke should heed Bagehot:
“To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now pursued.”
– Walter Bagehot, Lombard Street