Federal Reserve Chairman Ben Bernanke held the first public press conference in the history of the Federal Reserve yesterday, in an attempt to bring more transparency to the central bank (which faced its first ever audit last year). "I've personally always been a believer in providing as much information as you can," Bernanke told the gathered press. The conference was held just hours after the Federal Reserve Board announced that it will end its program of quantitative easing (QE2) -- aimed at boosting the sluggish economy -- on schedule in June, due to its assessment that "the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually." However, at the same time, the Fed revised its projections for economic growth downward. Previously, the Fed had estimated that growth this year would be between 3.4 and 3.9 percent, but now it is only predicting growth at 3.1 to 3.3 percent, due to contractions in exports, construction spending and military spending. The Bureau of Economic Analysis announced today that first quarter growth registered at just 1.8 percent. And while most of the questions during the conference centered on Bernanke's views on inflation, gas prices, and the nation's deficit, little time was spent on arguably the most pressing problem facing the country: continued high unemployment.
'VERY DEEP HOLE': Bernanke acknowledged during the press conference that the nation faces a "very, very deep hole" when it comes to job creation, noting that we would have to create seven million jobs just to make up for those lost during the Great Recession. The unemployment rate currently stands at 8.8 percent, while the broader U-6 measure of underemployment is at 15.7 percent. The African-American unemployment rate is 15.5 percent, and the Hispanic unemployment rate is 11.3 percent. While the private sector has been slowly adding jobs, it would still take several years at the current pace in order to get back to full employment. In fact, at the rate of job growth that occurred in March, full employment would not be achieved until 2019. As The Wall Street Journal noted, "even adding 300,000 jobs a month would take almost five years to get back to full employment." According to the Fed's own estimates, the economy will not reach full employment for another five years or six years, and the unemployment rate will still be between 6.8 and 7.2 percent in 2013. "The fact that we’re moving in the right direction, even though that's encouraging, doesn't mean that the labor market is in good shape. Obviously it's not," Bernanke said. To his credit, Bernanke also noted the problem with long-term unemployment, saying, "Long-term unemployment in the current economy is the worst, really the worst it's been in the post-war period." "We know the consequences of that can be very distressing, because people who are out of work for a long time, their skills tend to atrophy," he added.
NO FURTHER ACTION: The Fed has a dual mandate to both ensure full employment and price stability (i.e. combat inflation). During the conference, The New York Times' Binyamin Applebaum asked Bernanke, "Is it in the Fed's power to reduce the rate of unemployment more quickly? How would you do that and why are you not doing it?" Bernanke replied, "While it is very, very important to help the economy create jobs and help to support the recovery, I think every central banker understands that keeping inflation low is absolutely essential to a successful economy." Essentially, Bernanke's response was that the Fed could do more but won't due to worries about inflation getting out of control. However, as many economists have noted, inflation at the moment is exceedingly low (the Fed isn't meeting its own inflation targets, and its forecasts show inflation is contained for the foreseeable future), while unemployment remains stubbornly high. In fact, as Nobel Prize-winning economist Paul Krugman noted, "there is no tradeoff: more expansionary monetary policy is good in terms of both unemployment and achieving the Fed's inflation target." And Bernanke, during his days in academia, actually chided Japan for failing to engage in more expansive monetary policy to get itself out out of its 1990's slump. "The Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism," Bernanke wrote in 1999. So Krugman noted that "[Bernanke's] own theories -- and for that matter the doctrine endorsed by the Fed itself -- says that the central bank should be doing much more quantitative easing, not stopping with the US still facing high unemployment." As Center for American Progress Action Fund Fellow Matthew Yglesias wrote in the journal Democracy, "The idea that a time of unusually high unemployment and unusually low inflation would be a good moment for monetary policy-makers to start caring less about growth and more about price stability, especially when we already have price stability, is bizarre." Bernanke did say, though, that if Congress enacts spending cuts in the short-term that will slow economic growth too much, the Fed will be forced to act, and the Fed Board also announced that it will be keeping interest rates at around zero for the time being.
POLITICAL GAMESMANSHIP: Thus far, the steps to boost the economy that the Fed has taken have been too small and have thus ushered in lackluster results. But as the New York Times noted this week, "a vocal group of critics...argues that the Fed has already done far too much." These include several Republicans in Congress, who have been fearmongering about the effect of the Fed's attempt to spur economic growth. Sen. Mark Kirk (R-IL) wrote in a letter to Bernanke that, "you should prepare the Board for an early end to quantitative easing, along with other monetary measures to protect Americans from rising inflation." House Republicans spent two hearings earlier this year peppering Bernanke with questions about the specter of inflation. Senate Republicans have also refused to confirm Nobel Prize-winning economist Peter Diamond, who President Obama has nominated to the Federal Reserve Board, saying that despite his stellar economic credentials, he is not qualified for the job; Diamond is known to be an inflation "dove." Late last year, several Republicans also introduced legislation that would strip the Fed of its responsibility for promoting full employment, with Sen. Bob Corker (R-TN) calling the Fed's full employment mandate "inappropriate." By focusing more on inflation than full employment, even though inflation is low while unemployment is high, Bernanke and the Fed seem to be bowing to this Republican pressure.
No comments:
Post a Comment