I’m having trouble thinking of something to say about Fed chairman Ben Bernanke deciding to stay the course that I haven’t said again and again and again. What was true more than two years ago remains true today: The economy could still use more monetary stimulus, but Bernanke doesn’t intend to provide it. The Fed’s decision today to continue Operation Twist through the end of the year but to refrain from any additional easing suggests that he still thinks the unemployment situation is a disaster, but he still doesn’t plan to do much about it, although there were signs he might grudgingly step on the gas a bit in the future to prevent further deterioration.
The Fed has a dual mandate of stabilizing inflation and maximizing employment, and it’s clearly failing the second part. So why is Bernanke so reluctant to act? For one thing, he thinks fiscal stimulus from Congress would be more effective than another round of quantitative easing, which is probably true, but Congress isn’t going to pass any more fiscal stimulus, so it’s kind of irrelevant. But Bernanke also thinks the potential benefits of pumping more money into an already liquid banking system would be modest and uncertain, while the potential risks of freaking out inflation-obsessed investors who already think of him as Zimbabwe Ben could be dramatic and real. Maybe he’s wrong, but that’s what he thinks.
If there’s another bad jobs report next month, he’ll probably be able to persuade his board to loosen policy a bit to avert disaster. He thinks his QE2 helped prevent deflation; maybe a QE3 would help prevent a double-dip recession. But he clearly doesn’t intend to act with the whatever-it-takes abandon that reinvented central banking and helped save the world from a second depression in 2008 and 2009. He clearly doesn’t consider 8% unemployment an emergency on par with, say, 5 percent inflation, even though some inflation could be helpful right about now.
Oh, wait, I’ve said that before, too.
Basically, we’re in the same boat we’ve been in for a few years, and it’s an uncomfortable boat. Personally, I agree with the critics who think Captain Bernanke ought to be more aggressive. I’m not worried about inflation, and it’s worth a shot. But I suspect that the critics are overstating the good that additional liquidity and lower long-term interest rates would do. And so we beat on, boats against the current…