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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 15, 2010 at 10:00 AM

Fed shows its uncertainty, pulled between jobs and inflation

Understatement being a key qualification for a Federal Reserve chairman, Ben Bernanke said today in a much-anticipated speech that “overall economic growth has been proceeding at a pace that is less vigorous than we would like.” What the central bank might do about it remains unclear. Bernanke implied that the low inflation rate gave the Fed room to (perhaps) goose growth by buying long-term Treasuries. But he also talked about the need to move with “caution.”

So does that mean quantitative easing — the end result being printing more money and trying to make credit more abundant — will happen or not? The currency markets seemed to have discounted the dollar in that direction. Bernanke was not clear. The dollar has rebounded some as I write.

UC Berkeley economist Brad DeLong was among the disappointed. “I am still surprised at the Fed Chair we have,” he wrote on his blog. “Where is the Fed Chair who was willing to try to get ahead of the problems in late 2008? Or the “Helicopter Ben” of 2003? Or the student of big downturns in Japan in the 1990s and the U.S. in the 1930s. It’s a very different animal we have today. And this speech didn’t do much to convince me that he is going to do what ought to be done.”

A close reading of Bernanke’s remarks shows the tension between the Fed’s mandates of “maximum employment” and price stability, i.e., low inflation — and the tension on the Federal Open Market Committee about what to do. Bernanke lacks the consensus that Alan Greenspan enjoyed (but Greenspan never had to preside over the response to the crisis he did so much to seed).

Easing-advocates such as Paul Krugman argue there’s much more the central bank can do to alleviate high unemployment. But can it do miracles alone, with little help from the White House or Congress? As for those who want to let the market heal itself, explain that rough justice to the millions facing ruin. And where’s the self-healing despite repeated tax cuts and decades of deregulation?

I wonder how much new territory we’ve entered, especially when I hear constant and perhaps misleading comparisons with Japan in the 1990s. The U.S. economy today faces far more challenges, not least being enormous debt related to the housing bust and large numbers of sectors that no longer produce much here or employ Americans. In recent years, the Fed concealed this hollowing out by a huge credit bubble. Now, faced with the cold consequences, the Fed can no longer keep the mask in place.

Today’s Econ Haiku:

The great gaudy spree

Just sign on the dotted line

Anyone can sign

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