QE2 will end as planned in June. Monetary policy will “passively tighten”. In the Press Conference Bernanke fretted about core inflation going up, about the danger of rising commodity and oil prices and about inflation expectations – up but still anchored. The “hawks” are in control. There was unanimity but Bernanke conceded their points! To him, it´s a pity long term unemployment continues elevated, but the inflation “dangers” take precedence!

But that´s what you get when you obsess with inflation. The hawks have been “crying wolf” for a long time, even while inflation was tanking during most of 2009 – 2010. Ryan Avent of Free Exchange put it well a few days ago:

Unfortunately, the Fed didn’t set a policy target. Instead it opted for the $600 billion figure, thereby inviting critics to judge the Fed on whether $600 billion was, in fact, the right action to take. Since the Fed didn’t establish what, exactly, it was hoping to accomplish with its $600 billion, in terms of an observable policy target, it left the door open for people to assume that it was doing what it viewed as necessary to make the economy work again. And if the economy isn’t quite working again, well, observers can be forgiven for experiencing some skepticism of the value of expansionary monetary policy.

But that’s problematic for the Fed. It will be much easier for people, inside the Federal Open Market Committee and out, to argue that the benefits to additional expansion are smaller than believed and since the economy has improved meaningfully from last summer, there’s less pressure to act in the first place. The Fed chose a direction rather than a destination, and when its action left it short of the destination, it opened the door to criticism that the direction was wrong, when in fact it may simply have traveled an insufficient distance (perhaps thanks to unexpected headwinds). If you target a destination, you don’t run into that problem.

I´m more radical and think it has traveled no distance at all, it just stopped the “nose dive” as the two pictures below attest.


Please Mr. Bernanke, at least in 1999 you suggested Japan adopt a “Price Level Target”. You could do even better and adopt a “Nominal Spending Level Target”. Let “market conditions” determine how that will be divided up between real growth and inflation. If the 1933-37 period is a useful guide, real growth will rule the day. Otherwise you will be repeating the Eccles Fed mistake, which in 1937 raised required reserves because inflation was “rising”!

Update: Ezra Klein on what Bernanke should have said!

So, in conclusion, the economy is terrible, we should be doing more, and Congress should be doing much more, but instead we’re going to pretend the economy isn’t that bad, I’m going to pull back so you guys don’t jail me and everyone who works for me, and Congress is going to do the exact opposite of what economic theory and evidence would suggest and cut spending immediately while passing deficit-financed tax cuts for later. Oh, and I haven’t even mentioned the debt ceiling, because if I start cursing and crying, the markets will really freak out

6 thoughts on “Hypocrites!

  1. Excellent post! I regard the final sales chart that you posted as “the one chart to rule them all”.

    If the Fed does sees a move to the new lower level of NGDP and resume anything like trend growth as fit, then there is no mystery or surprise that their own forecast is not to return to the previous full employment level for another three years, as prices and wages adjust to the new long run trend.

  2. Marcus,

    I agree. I often ask myself why the press corps is basically on autopilot asking the same (non-)questions over and over again. However, then I realize why: nearly everyone in the press believes 1) the mainstream story of causality running from financial collapse to recession, and 2) nearly everyone automatically equates zero rates with easy monetary policy. Indeed, the Ezra Klein post you linked to does exactly those two things, which is why I don’t like it.

    Sure, you get the odd story at the margin that takes the view that “quasi-monetarists” have been pushing (Klein includes interest on reserves and price level targeting — the only redeeming features in the piece), but 9.9 out of 10 articles you read are basically predicated upon the two errors above. As DeLong would say, “Why oh why can’t we have better press corps?!”

  3. Pingback: Bernanke Q&A–It’s All in the Framing of the Question-Economic News |Coffee At Joe's

  4. Pingback: Bernanke Q&A–It’s All in the Framing of the Question : Invest My Money

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