Today in Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke delivered his annual address on the state of the economy. Bernanke responds to his critics, but not with any new argument that might persuade them. The speech coincided with some unimpressive news about economic growth and underlines the serious disconnect between what the Fed says and does and the realities of the economy. F'rinstance:For a sustained expansion to take hold, growth in private final demand--notably, consumer spending and business fixed investment--must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way.
This week's GDP estimate, though, makes clear that government spending is still driving economic growth; while consumer spending plays a part, its pace has not grown since it peaked in the third quarter of 2009. Business investment has been increasing, but the demand needed to sustain it hasn't materialized
Bernanke emphasizes his support for the status quo policy and promises that in case of further deflation, his Fed will respond. He also discusses the strategies that outside critics have asked the Fed to pursue -- purchasing more long-term securities (quantitative easing), more specific communication of the Fed's goals, and reducing a specific internal interest rate. He rejects all three, and also dismisses increasing inflation expectations, because in his view, the longer-term risk of losing credibility on inflation management outweighs potential benefits from any or all of the new strategies.
It's worth noting another disconnect here: While Bernanke says that "both inflation expectations and actual inflation remain within a range consistent with price stability," inflation has remained well below the Fed's unofficial 2 percent goal, and indeed slightly negative in the last five months.
Finally, he notes:
Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.
And yet the reason given for not taking greater action to support the labor market now -- even by Bernanke in this very speech -- is that it would be detrimental to the Fed's inflation-control goals. Again we see the Fed's mandate for inflation control take precedence over supporting employment, even as the Fed continually fails to meet its own inflation goals. That it will only seek to use more agressive policy tools when inflation falls well below expectations, and not when employment does, is a key window into Bernanke's mind-set.
Market participants, policy-makers, and the public have all been looking askance at the Fed of late, concerned about the justification for its decision-making and the unity behind its strategy. I'm not sure anyone will come away from this speech with a new sense of clarity or confidence in the U.S. central bank.
-- Tim Fernholz
