The Fed’s Forthright Admission About Our Messy Economic Situation
The Federal Reserve concluded its June meeting today with a statement and a Ben Bernanke press conference. A variety of measures were announced, including an extension of an arcane but consequential policy of buying hundreds of billions of dollars of Treasury bonds ($267 billion to be exact) in order to keep interest rates low, on top of the $400 billion the Fed has already purchased since last September.
But the most meaningful statement probably was not the one that Chairman Bernanke intended: the economic situation “is not entirely clear.” How rare for a high public official to say something so unequivocally true.
Clearly, as the Federal Reserve’s own intensive monitoring of economic data shows, activity is slower and more sluggish than was expected at the beginning of the year, and the Fed reduced its forecast of growth to between 1.9 percent and 2.4 percent, almost half a percent lower. It also sees no meaningful improvement of the unemployment rate below 8 percent, no inflation above 2 percent, and real risks from the euro-zone crisis impeding the financial system and the health of the U.S. economy. Hence the decision to extend its bond purchase program, graced with a Pentagon-like name “Operation Twist,” and hence as well its stated willingness to take more aggressive action if conditions continue to deteriorate.
The agglomeration of data, however, is not offering a clear picture to economists and policymakers who yearn for one. The present does not fit past patterns, notwithstanding assertions by some who claim that we are still in the slow-mo recovery from a banking bubble. Activity in April and May clearly paused, and we will have further confirmation of that when companies begin reporting in July. But whether they slowed because the U.S. is stuck or because Europe led to a global slowdown under the yellow flag of possible implosion, well that, as Chairman Ben said, is “not entirely clear.”
Nor is it entirely clear what could shift the current trajectory of the U.S. economy. Republicans and libertarians already view both the Democrats and the Federal Reserve with contempt or distrust. In fact, the Fed is widely scorned by the Republicans and the Tea Party as having injected too much liquidity into the system and permitting too much debt and too little fiscal discipline. They believe that any further measures by the Fed to ease the availability of credit will only lead to more debt and eventually debilitating inflation. Hence the animus of former candidate and Texas Governor Rick Perry, candidate Ron Paul, and even Mitt Romney. On Face the Nation this past Sunday, he too warned about politicians who “want to temporarily boost something” and thereby create the danger of inflation down the line.
The inflation bogeyman remains potent and resonant, not just for Americans but of course for Germans who have been at the forefront of austerity and have resisted more spending or liquidity. From this perspective, the actions of central banks over the past two years have been either counterproductive or destructive. That’s because central banks have indeed—by quietly, almost covertly, propping up the financial system. That’s in contrast to governments that are spending badly or not at all and which seem to be in denial about systemic and structural shifts in Europe and the United States that are making past expectations of future growth look at best unreasonable and at worst delusional.
In this dynamic, however, central banks are not the culprit. Many of their leaders, from Bernanke at the Fed to Mario Draghi at the European Central Bank to their Chinese, English, and global compatriots, have expressed real frustration and none-too-subtle criticism of the fiddling-while-Rome-burns tendency of politicians who fail to grasp how tenuous the financial system is. They also recognize that monetary action in the absence of fiscal and legislative action is limited and ultimately will fail. But contrary to the critiques of Romney, the Germans and the deficit and inflation hawks, such action has been a vital dam keeping the system intact.
Fighting inflation in today’s world has become a global Maginot line: a defense designed for the last war. Inflation may have been the central challenge of 20th-century economies, but today it is not. Today the challenge is maintaining high levels of prosperity in Europe and the United States while changing expectations of future growth and finding ways for that prosperity to be more widely shared. Deflation is far more of a challenge, and one that central banks are not as suited to meet, given that almost all have 20th-century mandates focused on inflation.
At least the bankers have a degree of honesty in the midst of their wonkiness, and Bernanke, who has at times displayed arrogance and trumpeted his certainty about his ability to meet crises, has been candid and honest about the opacity of the economic data and the unpredictability going forward. That is unsatisfying to markets and media, but it is a grown-up statement about the world as it is: complicated and difficult to predict. That is the best starting point for addressing our issues, rather than the bombast of campaigns or the Armageddon scenarios about overspending and debt that are reductive, simplistic, and therefore wrong and misleading.
“Not entirely clear” isn’t entirely satisfying, but it is truer than the false certainty of those predicting imminent economic collapse or who are looking to score easy points in election season. And in a world of mediocre politics and politicians who seem caught between treacherous electoral currents and a rapidly morphing world, the maturity of central bankers is a bright spot. They may not be right, and they are often constrained by mandates that inhibit their actions and lead to less optimal policies. But at least they are not blinded by ideology and are able to confront the world as it is rather than how they wish it to be. Would that were not in such short supply.