Chairman Eeyore: Bernanke’s Dour Outlook Explained

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Ben Bernanke and the Federal Reserve have been taking some big leaps in recent months: policy prescriptions tied to explicit dates, dire warnings to Congress, open press conferences, college lectures and even a Twitter feed. So while it’s still natural to expect characteristic caution from the Fed chairman, it’s not impossible to imagine him breaking out of character.

That’s exactly what Betsey Stevenson and Justin Wolfers urged him to do a while back in a great column explaining Bernanke’s options for talking about economic outlook this year: As the recovery picks up, Bernanke might remain bearish on the state of things, pointing to still-troubling signs in the data to signal that the central bank will keep interest rates low for an extended period–this would be the Eeyore strategy, they wrote, named for the sad sack donkey from Winnie the Pooh. Or, like optimistic Tigger, Bernanke might throw caution to the wind and talk up the recovery, encouraging businesses to invest while promising to hold interest rates down for an extended period, no matter how much the economy heats up. In a Monday speech at the National Association for Business Economics, Bernanke made clear which way he’s going.

“A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed,” Bernanke said. “Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force. Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.” And so “further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” he concluded. What does that mean? Eeyore strategy is in effect.

Now, Bernanke might actually be more pessimistic than other forecasters on the near-term job market. He said unemployment won’t be able to continue to fall without more growth, which economists fear will be slow this year. But his speech reads a lot like expectations setting: He’s signaling future accommodative policy through his pessimism while keeping his options open in case the hawks, always squawking about a potential spike in inflation, are proved right. This isn’t without its risks–bearishness could scare some companies off investing, making things worse than they need to be. But it’s more or less the kind of careful approach we can still apparently expect from Bernanke, new Fed boldness or not.

“Good morning, Pooh Bear,” Eeyore once said. “If it is a good morning. Which I doubt.” “Good news” was basically the topic of Bernanke’s speech on Monday. If it is good news, which he doubts.