Bernanke battles on

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Scott Pelley interviewing Ben Bernanke in Washington, DC, March 2, 2012

Article Highlights

  • The “tapering not tightening” claim is a semantic game that has confused markets.

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  • Bernanke concedes that tapering’s timing depends on the path of the economy. That implies that he does see tapering’s timing as important.

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  • When the dust settles, we shall probably see that the QE-ZIRP, double-barreled monetary boost continues, at least until growth gets back above 2%.

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Chairman Bernanke’s dovish written testimony for the Humphrey-Hawkins hearings on the economy and Fed policy aims to make three points: tapering (less bond purchases/QE by the Fed) is not tightening; when tapering occurs depends on the economy; and zero interest rate policy, ZIRP, will continue for an extended period, probably until late 2015.

The “tapering not tightening” claim is a semantic game that has confused markets. Tapering is less easing, the “lifting off the accelerator” analogy used by Bernanke. Eventually, QE will end. When it ends is what matters. If, as is currently the case, the economy is slowing, inflation is falling, and fiscal drag is heavy, ending QE, say in September, as some have said the FOMC will do, surely is an unwarranted reduction in stimulus. If you are starting up a steeper hill, you don’t lift off of the accelerator. You push down harder, even if it might not help you speed up. At least you don’t start rolling back down the hill.

Bernanke concedes that tapering’s timing depends on the path of the economy. That implies that he does see tapering’s timing as important. Again, when tapering starts matters a lot and should be conditional of the pace of growth and/or the path of inflation. More specifically, if in September the latest GDP numbers show growth below 1% and inflation is below 1% as well, reducing QE makes no sense. We can, I think, infer from Bernanke’s written testimony that he would readily agree with that claim.

In raising the issue of ZIRP while discussing QE, Bernanke accentuates the sometimes-unnoticed fact that the Fed’s unconventional, post-crisis policy is two-dimensional. ZIRP preceded QE, which was first introduced with QE 1 in March, 2009 after it became clear that the ZIRP-ERRA ($800 billion fiscal stimulus) combination wasn’t working. QE took on the “monetary big gun” role but it amounted to having Fed-financed budget deficits, something that made many Fed critics, both inside and outside the FOMC, uneasy. Surely, they warned, inflation would follow. When that didn’t happen because the economy was in a liquidity trap, something far too “Keynesian” for the Fed’s supposedly all-knowing critics to acknowledge, the cry became that “bubbles” will develop that will make exiting QE even more painful than not pursuing it. There is reason to doubt that notion, especially since many of the “bubble bursters” had previously claimed that a bubble can’t be identified until it bursts, that is, until it’s too late.

When the dust settles, we shall probably see that the QE-ZIRP, double-barreled monetary boost continues, at least until growth gets back above 2%. Then the Fed will start the “taper and pray” phase of the Great Monetary Experiment to end the Great Recession. By then we’ll have a new Fed chairman to kick around.

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John H.
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