Is Excess Economic Slack No Longer A Factor For Ben Bernanke?
Traditionally the primary metric watched by Fed Chairmen when determining changes to monetary policy, especially on the tightening side, has been the observation of a contraction in the "excess slack" component in the economy, defined rather loosely, but primarily in terms of excess unemployment over the dogmatic steady-state unemployment rate in the 5-7% range. Today, in a Q&A at the Woodrow Wilson International Scholars dinner, Ben Bernanke joined Hoenig and other Fed members in stating that the Fed will no longer await a "sizable" drop in the jobless rate before raising interest rates. This is good, because as the San Fran Fed discussed in an analysis from exactly a year ago, the unemployment rate is not going down any time soon. Does this also mean that the Fed is no longer wed to the worst, and most procyclical indicator imaginable, i.e., economic slack? The answer of course, is no. And the only reason Bernanke is pretending to care about tackling the issue of inflation in advance, is due to the sudden and dramatic focus the ECB's policies have gotten in Europe, coupled with the dramatic politicization of Trichet's bank. It is ironic, that in the US the Fed is using the "political" card when demanding free reign in its complete opacity to do precisely the things that in Europe bring about screams of central bank politicization. But then again, they can't print a reserve currency, can they. Thus, the use of a double, and a 180 degree opposite at that, standard is not only welcome but expected.
Market News reports:
Noting that monetary policy takes a long time to work, Bernanke warned, “We can’t wait until unemployment is where we’d like it to be, we can’t wait until inflation gets out of control before we begin the process of normalizing interest rates.”
“We are going to have to make a judgment about when is the appropriate time to begin moving and begin moving towards a more normal policy,” he said, “but doing that in a way that anticipates where the economy is going to be a year or a year and a half down the road.”
So it will be the case, Bernanke reiterated, that when the Fed starts the process of tightening monetary policy that the economy will not yet be back to full employment.
Regarding his thoughts on how the recovery in the U.S. is progressing, Bernanke noted good "momentum” in consumer spending and business investment, saying, “There are some signs that the private sector is picking up the baton and moving the economy forward.”
In addition to empty rhetoric about rate hikes, Bernanke also had the following words of caution:
The banking system is also not “completely healthy” Bernanke continued, with credit availability not yet at the point the Fed would like it to be. Banks are being relatively cautious with regards to new loans, he said, focusing on deleveraging and reducing their balance sheet.
On the precarious situation in Europe, Bernanke said the Fed is watching the situation “very closely,” stating his belief that the EU remains committed to preventing defaults by its peripheral countries and that the E440 billion special purpose vehicle will cover the obligations of the struggling nations “for a number of years.”
Noting the continued uncertainty in market, Bernanke assured that, “European leadership is strongly committed to doing whatever is necessary to preserve the euro, preserve the euro zone … and avoid the financial problems that would certainly arise if Greece or another country defaulted.”
This led him to comment on the United States’ own deficit situation, saying it will not be possible for the government to balance its budget this year or the next. “The recession is too deep, the loss of tax revenue is too great, the spending to try and support the economy and the financial system too large.”
And some glowering hypocrisy, regarding the US $13.1 trillion in debt, incurred primarily in connection with bailing out his Wall Street superiors:
Over the next three to six years, however, the U.S. must gain control of its public debt, underlining the need for a medium-term plan to bring the U.S. fiscal house in order, Bernanke said.
All in all, another day in the Chairman's life, full of talk, empty promises and bluster, and nothing but. In the meantime, is it too much for the disgruntled US population to ask just what the outcome of today's discussion on the Discount Rate hike was? Or will the market interpret the mere lack of an announcement as equivalent to ongoing monetary looseness? Now that would be ironic: after all the Chairman spent an entire afternoon claiming he would do the sensible thing at the end of the day. Should we then assume that he was, gasp, lying?