On Wednesday afternoon, Ben Bernanke channeled Miley Cyrus. When it comes to having the central bank conjure up cash out of thin air to buy bonds and mortgage-backed securities in an effort to boost the economy, he effectively said: “And we can’t stop. And we won’t stop.”
In response, stock traders began twerking en masse. Quantitative easing, the program of buying bonds and mortgage-backed securities, has been a boon to stocks. Why? It’s keeping interest rates down and pushing people into higher-yielding instruments like stocks. The prospect of any tapering, or reduction, in the rate of purchases would push interest rates up and make stocks less appealing. Bernanke said he’d provide the fuel for the party for at least a few more months. Stocks jumped by about 1 percent after the announcement.
While not a change in policy, this marked a change in posture. In June, Bernanke and the Fed had implied they would start to reduce the pace of bond purchases in the fall and set the Fed on a path to phasing out the purchases altogether over the course of a year. But the Fed said at the time that it would depend “on the evolution of the economic outlook.” It had to see evidence that inflation would be rising and jobs would continue to be added.
But that hadn’t happened. Here’s the Fed’s the statement. While things have continued to muddle along, the Fed had not yet seen enough improvement, especially in the labor market, to start tapering. (“The economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such reduction.”) Earlier this month, the Bureau of Labor Statistics reported that the economy produced only 169,000 jobs in August, and revised down the total jobs created in June and July by 74,000.
Not everybody is thrilled by the Fed’s actions. Corporations have gorged on cheap debt, but many CEOs say they’d like to see the Fed remove its artificial support. On CNBC Wednesday morning, Goldman Sachs CEO Lloyd Blankfein called for the Fed to start tapering. And hard money types—libertarians, gold bugs, inflationphobes, many Republicans—have wanted the Fed to stop doing what it’s doing. Bernanke had words for these folks, too, though they were characteristically indirect. Essentially, he said, “You’re part of the problem.”
Buying bonds is one form of stimulus, but it’s a really ineffective one, especially when interest rates are low. Higher wages—employing more people for more hours for more pay—are an incredibly powerful form of stimulus. Americans, particularly those at the bottom and the middle rungs of the income ladder, tend to spend almost everything they make every two weeks. More money flowing into payroll systems translates pretty quickly into more money flowing into the economy. But that’s not happening, or it’s not happening fast enough. Between August 2012 and August 2013, average weekly earnings of private-sector employees rose just 1.7 percent—even though companies have epic amounts of cash on their books and have been making very significant profits. There were 3.7 million job openings in the U.S. at the end of July, but companies are in no rush to fill them. In June, Bernanke had said that the tapering could start only once gains in the labor market seemed persistent and safe. On Wednesday he said that he hadn’t seen enough improvement. If CEOs want him to stop stimulating the economy, Bernanke suggested, they’d have to start stimulating the economy themselves.
Bernanke also had a message for Congress: stop being such jerks and fund the budget, get rid of the sequester, and raise the debt limit. He didn’t put it quite so simply. But it is easy to read between the lines. The modern Fed has always seen its job as counteracting the contractionary activities taking place in the economy. If companies are cutting jobs, the Fed cuts interest rates. On Wednesday, Bernanke said the Fed would have to continue its bond-buying activities because the economy faced headwinds. Among the headwinds Bernanke cited were “tighter financial conditions,” i.e., higher interest and mortgage rates. That one is partially on the Fed chief. Interest rates on the 10-year bond started spiking this spring and summer after the Fed said it might curtail its bond purchases.
But there’s something else going on. In the statement, Bernanke noted that “fiscal policy is restraining economic growth.” Over and over again in his press conference, he cited “restrictive fiscal policies,” and problematic debaters over government finances. The sequester, tax increases, and the continual Republican harping on budget cuts have all caused damage to the labor market. I’ve dubbed this the “conservative recovery” because the private sector has added jobs every month while the government cuts them. Between May 2010 and July 2013, government cut 1.177 million jobs, while the private sector added 7.07 million positions. Reduced government spending is also cutting demand more broadly in the private sector. Furlough government employees and contractors, and they’ll start spending less.
The economy has adjusted to the sequester over the last several months. Now, however, there are new problems: the impending clown show/train wreck/debacle over the budget and the debt limit. Simply put, Republican leaders in Congress either lack the desire or the ability to get their caucus to agree on the necessity and wisdom of (a) funding the government, and (b) paying its debts. And it’s starting to keep Bernanke and his colleagues up at night. In response to a question from a Fox Business Network report, Bernanke said, “A government shutdown, and perhaps even more so, a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy.”
In essence, Bernanke was saying that Republicans’ increasingly pathetic efforts to link a budget or a debt-ceiling increase to a repeal of Obamacare was hampering his ability to start tapering. And here’s where we veer into irony. Bernanke, a Republican, has become something of a hate object on the right. Remember Rick Perry’s comments about “treasonous” actions? Or Mitt Romney’s promise that he’d replace Bernanke? The reality is that Bernanke can’t do what many Republicans want him to do until they stop behaving the way they behave. In effect, on Wednesday he told Republicans they have a very painful choice. They can continue to call for needless cuts to government spending and brinksmanship and speak cavalierly about not boosting the debt ceiling. Or they can have less expansionary monetary policy. But they can’t have both.