“As time goes by”

Five months ago, following Bernanke´s speech at Jackson Hole, I quoted (my bolds):

…This economic healing will take a while, and there may be setbacks along the way. Moreover, we will need to remain alert to risks to the recovery, including financial risks. However, with one possible exception on which I will elaborate in a moment, the healing process should not leave major scars.

Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view–the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.

That´s an important recognition. But to promote a stronger recovery in the near term, the Fed has somehow to lift the constraint imposed by:

Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability. Low and stable inflation improves the functioning of markets, making them more effective at allocating resources; and it allows households and businesses to plan for the future without having to be unduly concerned with unpredictable movements in the general level of prices.

The ideal is not to “temporarily” increase the inflation “target” as some have suggested, but to set a “target” for the LEVEL of spending you want to achieve to put the economy on the long run growth path that ensures the economy is producing at its full potential.

Has there been any advance towards “promoting a stronger recovery”? I don´t think so. But Bernanke has managed to make the 2% inflation target “official”!

One thought on ““As time goes by”

  1. Sheesh. If the Fed wants private businesses to know how to plan, why not clearly lay out what the Fed will try to do.

    Why all the peek-a-boo and mumbo jumbo?

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