“Monetary Policy is highly accommodative & is providing Significant Benefits”

Bernanke´s testimony: True or False?

With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy. Normally, the Committee would provide policy accommodation by reducing its target for the federal funds rate, thus putting downward pressure on interest rates generally. However, the federal funds rate and other short-term money market rates have been close to zero since late 2008, so the Committee has had to use other policy tools….

In the current economic environment, monetary policy is providing significant benefits. Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment. Importantly, accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the Committee’s 2 percent longer-run objective.

To him it seems to be true. But surely, if monetary policy had really been highly accommodative for 4 ½ years the situation would surely be very different now. At least you wouldn´t be worried about inflation “falling even further below the target”!

And if you judge the stance of monetary policy by what is happening to nominal spending (NGDP), monetary policy was never before so tightfisted in a recovery (and note that this recession was characterized by the most prolonged fall in spending since the 1930s!), being the best explanation for the highly parsimonious ‘recovery’ in employment. The chart illustrates.

Accommodative and Beneficial

2 thoughts on ““Monetary Policy is highly accommodative & is providing Significant Benefits”

  1. I don’t read the text quoted here as a claim that policy is or has been accommodative, only that we’re at the ZLB and the Committee is utilizing other tools. Perhaps I am reading it too literally, not translating it from Fed-speak, you know the way they talk for hours and say practically nothing that makes sense.

    I don’t take what he says very seriously, anyway. He doesn’t have control over what is going on when he should; and he’ll probably just turn around and defend the policies that got us here at his next press conference. He’s a lost cause.

  2. Here is Bernanke speaking in 2003. In Japan (This is amazing btw):

    My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt–so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent. …

    Isn’t it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio. The BOJ’s purchases would leave the nominal quantity of debt in the hands of the public unchanged, while nominal GDP would rise owing to increased nominal spending. Indeed, nothing would help reduce Japan’s fiscal woes more than healthy growth in nominal GDP and hence in tax revenues.–Bernanke, Japan, 2003.

    Who has captured Bernanke, and stolen his body in the years hence?

    BTW, the above quote is from the latest column by James Pethokoukis, who is now a Market Monetarist! At AEI!

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