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Practical Economics

Bernanke Taking His Case to the People

As inflation hawks and others peck at the Fed’s easy money policy, its chief is mounting an unusual defense.

He’s been on 60 Minutes twice, a town hall meeting in Kansas City, Mo., that aired on cable television, and in early February he’ll answer questions at a National Press Club luncheon. Not a surprising schedule for a federal policymaker -- unless that policymaker happens to be chairman of the usually reserved central bank. Unlike his predecessors, Federal Reserve Chairman Ben Bernanke is going public in an effort to explain the Fed’s actions to national audiences and to assuage fears of inflation down the road.

Brief policy statements from the rate-setting Federal Open Market Committee used to be the norm -- the principal source of clues for Fed watchers eager to discern the future direction of interest rates. With little more to go on, the bond market plus legions of bankers, economists and others parsed phrases and pored over every word of the Fed’s carefully considered prepared statements. Few others paid much attention to the workings of the central bank. But the extraordinary events of the past three years and the Fed’s reactions to them have pushed it and its chief into the public spotlight.

Critics say that the Fed is printing money -- with disastrous consequences likely -- and that Bernanke is exercising power as no previous central bank chief has done. Usually, the head of the Fed would reply to such criticism in a forum dominated by Fed cognoscenti, bankers and businesspeople -- if he replied at all.

But Bernanke has decided that he needed a broader audience this time -- at least in part because he wants to ward off any self-fulfilling prophecies of inflation.


So in late December, on the national television show 60 Minutes, he warned that it could take “four or five years before unemployment falls to 5% or 6%” and defended the Fed’s plan to purchase $600 billion in long-term Treasury debt, considering the gloomy outlook. He told his critics that “they’re not looking at the risks of not acting. This fear of inflation is very, very overstated.”

More such public outreach is likely, if only because agitated Republicans in Congress continue to snipe at Bernanke and his policies. They’re being egged on by John B. Taylor, a Stanford University professor of economics who served as a member of both Bush administrations and developed a rule that would put Fed-led interest rates on autopilot. Taylor argues that the Fed’s huge debt purchase not only isn’t lowering unemployment but also is sowing the seeds of inflation in the not-distant future. Those in his camp think that the benchmark federal funds rate, now near zero, should be 1%.

Bernanke and his supporters counter that raising interest rates to that level would slow an economy still struggling to recover from the worst downturn since the Great Depression in the 1930s. What’s more, they point out that there’s plenty of time for the Fed to act. “We could raise interest rates in 15 minutes if we had too,” said Bernanke. And when asked what level of confidence he has in the Fed’s ability to control inflation, Bernanke answered, “One hundred percent.” Surely every Fed chairman thinks that way, but few dare to say it in public.

The fact is, there’s time for the Fed to act deliberatively and slowly, though it is possible to wait too long, as happened during the 1970s, when a Fed too slow on the trigger allowed inflation to take root. If that were to happen again, rates would be forced higher and renewed recession would be inevitable. Attempting such fine-tuning and failing is a common mistake, say Taylor and other Fed critics -- a mistake that would be eliminated if rules rather than human judgment dictated the raising and lowering of rates.


Whether or not they are right, it’s clear from both the Fed’s formal statements and Bernanke’s public utterances that the Fed is a little more optimistic about the economy’s growth than it was at the end of last year, but that it still sees problems such as high unemployment, a depressed housing sector and tight credit as requiring it to maintain a zero-interest policy. What’s more, to the dismay of the Fed’s critics, Bernanke and his allies leave open the possibility that, come June, when the current $600 billion Treasury buying is complete, more may be needed.