Bernanke Tries to Manage Expectations of Fed Role
Federal Reserve officials and economists appear increasingly united in their view that the partisan gridlock on fiscal policy in Washington has clouded the prospects for a faster and stronger recovery.
The Fed chairman, Ben S. Bernanke, who has assiduously avoided taking sides in fiscal debates, said on Friday that the central bank stood ready to use a variety of tools to forestall deflation, a broad decline in prices. But he made it clear that the Fed could not simply conjure up a recovery by manipulating interest rates and the money supply.
“Central bankers alone cannot solve the world’s economic problems,” Mr. Bernanke said in what became a theme of the annual Fed policy symposium here, organized by the Federal Reserve Bank of Kansas City.
Mr. Bernanke has told Congress that some additional fiscal stimulus could be helpful in supporting the recovery, as long as it was accompanied by a credible plan to gradually bring deficits under control and stabilize the ratio of debt to gross domestic product, the broadest measure of economic output.
He has not weighed in on specifics — like the Obama administration’s proposal to spur lending to small businesses, or the call by some Republicans to extend all of the Bush-era tax cuts — but has instead expressed hope that a bipartisan fiscal commission appointed by Mr. Obama will deliver specific and meaningful proposals.
But the commission is not scheduled to deliver its report until December, and the likelihood of additional Congressional action to support the economy before the midterm elections in November seems to be shrinking by the day.
So even as Mr. Bernanke outlined the Fed’s options and credited stimulus packages with helping the global recovery, he appeared to be tamping down expectations for a government-led fix. “For a sustained expansion to take hold, growth in private final demand — notably, consumer spending and business fixed investment — must ultimately take the lead,” he said.
He added, optimistically, “On the whole, in the United States, that critical handoff appears to be under way.”
Mr. Bernanke’s reluctance to weigh in on fiscal policy — a departure from his predecessor, Alan Greenspan, who endorsed the tax cuts of 2001 and 2003 but now supports letting all of them expire — is partly a reflection of his personality but also stems from the Fed’s delicate political position.
“The Fed has in many ways been left holding the bag while fiscal policy has fallen short,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan group that has urged an immediate commitment to reduce the deficit in the medium term. “There is excessive pressure on the Fed, because of the uncertainty about fiscal policy.”
Thomas D. Gallagher, a senior managing director at the research firm International Strategy and Investment, said it was wise of Mr. Bernanke to lay out the potential costs of additional actions the Fed could take, like resuming large-scale purchases of government debt.
“None of them is an unambiguously positive, no-brainer option,” he said. “The Fed should try to limit expectations about how much monetary policy can accomplish in this post-crisis period.”
In one of five research papers delivered at the symposium, which ended Saturday, Eric M. Leeper, an economist at Indiana University, challenged monetary economists to focus more attention on large fiscal deficits. In an analogy that stirred debate, he said that monetary policy had been honed to a science, and he likened fiscal policy to medieval alchemy.
“In normal times, fiscal policy doesn’t pose insurmountable problems for monetary policy,” said Mr. Leeper, a former Fed researcher. “These normal times may be coming to an end. Demographic shifts in most of the advanced economies are putting ever-increasing demands on government spending. We’re heading toward an era of fiscal stress.”
Public confidence in the Fed’s ability to maintain price stability relies in part on expectations that government debts will not rise to unsustainable levels, Mr. Leeper said, suggesting that such expectations were eroding.
Douglas W. Elmendorf, director of the nonpartisan Congressional Budget Office and a former Fed researcher, said Mr. Leeper’s paper “greatly overstates the potential for fiscal policy to be made in a scientific way.”
“Fiscal policy is intrinsically about distributional choices,” he said, adding, “There is no scientific basis for saying how large the government deficit should be — any more than what my level of savings should be.”
Robert B. Zoellick, president of the World Bank, said that while the scientific precision of monetary policy had perhaps been overstated, he wished that Mr. Bernanke had mentioned the role fiscal policy could play in spurring the recovery. “The fiscal policy challenges that I see are at a different order of magnitude than anything I have either observed or dealt with over the last 25 years,” he said.
Not all countries leave every debt and deficit question to politicians: Sweden and Hungary use fiscal policy councils, while Israel and Chile use fiscal rules that cap growth in government spending. “Things like the White House budget commission are just alchemy as usual,” Mr. Leeper said.
Another paper that drew considerable discussion here, presented by Charles R. Bean, deputy governor of the Bank of England, suggested that asset purchases to lower long-term interest rates — like the Fed’s purchase of $1.25 trillion in mortgage-backed securities in 2009-10 — have been successful in responding to the recession but “are probably best kept in the locker marked ‘For emergency use only.’ ”
Mr. Bean, like Mr. Bernanke, argued forcefully against the idea of raising medium-term inflation targets in response to recession.
“The thing I’m most worried about with some of the current discussion is that monetary policy is going to be asked to do more than it’s capable of,” he said. “It’s useful for stabilizing prices, but if we expect it do multiple things simultaneously, I think we are going to be stirring up trouble for ourselves in the future.”
Or as Jacob A. Frenkel, chairman of JPMorgan Chase International and a former governor of the Bank of Israel, put it: “We all know that the main gorilla in the room is fiscal policy.”