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Jon Talton

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

March 21, 2013 at 10:14 AM

Bernanke: No exit strategy, yet

The Federal Reserve Board released a statement Tuesday from its policy-making Federal Open Market Committee promising to keep interest rates low — they’re essentially at zero — through 2015. The policy will continue after the Fed’s bond-buying program winds down. The reason: High unemployment persists. Washington state outside of metro Seattle is Exhibit A. Inflation remains low, so, for now, the central bank has plenty of running room. During the FOMC’s two-day meeting, Chairman Ben Bernanke said, “We are seeing improvement. One thing we would need is to see this is not temporary improvement.” But the Fed will pursue easy money at least until unemployment has fallen to 6.5 percent from today’s 7.7 percent.

Based on recent history, a point should come when the Fed can pivot and start raising interest rates. But these are no ordinary times. The Fed’s low rates have juiced the stock market and given the big banks plenty of money at rock-bottom rates to gamble with. The benefits have been slower to come to smaller businesses and average borrowers, many of the latter still ruined from the financial panic and still over-leveraged. With a slow-growth economy combined with a variety of job-suppressing forces, including robots, and lack of federal stimulus, will unemployment in the 7 percent range be the new normal?

Things will get interesting if growth accelerates and inflation picks up — but joblessness remains high. Then the Fed will be torn between its twin mandates to keep employment high and inflation low. What then?

A number of economists have urged the central bank to set an inflation target of 4 percent as a signal to markets that it will stay the course even if a modest increase in prices begins. That riles others who remember the inflation of the 1970s, although that phenomenon had clear causes — the oil shocks of the decade and weak leadership at the Fed chief among them. The bigger danger is a speculative crash somewhere — China, Europe — that causes another panic, the Too Big To Exist Banks can’t be “orderly” wound down — and the Fed’s defibrillator doesn’t work.

If we’re in a new version of the 1930s, there’s no reason to worry about serious inflation in the United States. That doesn’t mean many people won’t feel pinched as their paychecks stagnate while prices rise slightly. But the past five years have had a habit of surprising. We’re long past the days when Maestro Alan Greenspan could predictably cook up another bubble and pull off those famed “soft landings.” What comes next is anybody’s bet (and many bets are at work in the $600 trillion derivatives market). One thing to consider: The United States suffers recessions between every seven to 10 years.

And Don’t Miss: How JPMorgan uses the little-covered House Agriculture Committee to gut regulations | Salon

Today’s Econ Haiku:

Seattle job boom

If you’ve got high-end skill sets

Otherwise, fizzle

Comments | More in Banking, Federal Reserve

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