Wow. I’ve been a broken record about America’s stay-the-course monetary policy, about the Fed failing to fulfill its mandate to maximize employment at a time of rampant joblessness, about Ben Bernanke channeling Jerry Seinfeld and basically doing nothing while Congress was doing less than nothing. Well, Bernanke and the Fed did something Wednesday. They did something big.
The technical details are pretty dull. The Fed announced that it intends to keep its key interest rate at zero until unemployment drops to 6.5%, the first time it’s ever set a target for employment. It also signaled that it will tolerate inflation as high as 2.5%, above its stated goal of 2%. And it extended its “QE3” bond-buying program to hold down long-term interest rates. What it means is that Bernanke and his fellow inflation doves have won their argument with the hawks, and the Fed is stepping on the accelerator instead of riding the brakes. After three years of doing a wonderful job of maintaining stable prices while doing a terrible job of maximizing employment, the Fed finally seems determined to take its dual mandate seriously. As Bernanke admitted in his press conference, the Fed has consistently overestimated the pace of growth since the recovery began in 2009.
The hawks who already describe Bernanke as Helicopter Ben and Zimbabwe Ben are sure to screech that the new targets will produce hyperinflation, which they always think is just around the corner. But as I’ve written, a little inflation can be good for economic growth, encouraging families and businesses to spend and invest rather than hoard their cash. And persistently high unemployment is a tragic waste of human capital. It ruins lives. It hurts kids. It’s the enemy.
In an ideal world, Congress would try to do something about it with fiscal policy. But after Republicans reclaimed the House in November 2010, the Capitol Hill conversation turned to austerity. President Obama refused to accept GOP austerity demands, so the U.S. hasn’t followed Great Britain back into recession. But Republicans have refused to accept Obama’s push for more fiscal stimulus, and the recovery has remained weak. The so-called fiscal cliff, with over $500 billion in tax hikes and spending cuts due to kick in January 1, could impose even more pain if Congress cannot work out a deal to avoid it; Obama has proposed some additional short-term fiscal stimulus, like extending unemployment benefits and payroll tax cuts, but Republicans have been allergic to stimulus since he took office.
It would have been nice if Bernanke had picked up the slack sooner. Maybe he feared the political consequences of juicing the economy before the election; Governor Rick Perry had warned that “we would treat him pretty ugly down in Texas” if he tried another round of monetary stimulus. Maybe some of his hawkish colleagues who had been fighting for tighter policies came around to his side after their predictions stubbornly failed to come true; to his credit, Narayana Kocherlakota of the Minneapolis Fed changed his views after seeing more data. Maybe Bernanke just figured that enough was enough, that it shouldn’t require a global economic meltdown to get the Fed to do creative things, that it was time to re-adopt the whatever-it-takes attitude that made him Person of the Year in 2009.
There will be more to say about what these new targets mean for the Fed. But for now, they should help the economy—or at least prevent cliff-diving politicians from harming the economy as much as they might like.