Federal Reserve Chairman Ben Bernanke’s confidence in the underlying factors driving long-term growth in the United States is nothing short of "heroic", according to Stephen Lewis, the chief economist at Monument Securities.
Following his speech in Jackson Hole, Wyoming on Friday, Lewis has been looking at how the Fed Chairman views the economy and how his theoretical assumptions on long-term growth will influence his decision on whether to pump more money into the system.
"Mr Bernanke is well aware that economic theory makes no claim for monetary policy’s effectiveness in sustaining growth over the long term. The idea is, rather, that it influences inflation," said Lewis in a research report.
Bernanke, in Lewis’ opinion has always attempted to justify unconventional measures in fighting deflation following his work on the great depression.
“It was wholly consistent with his general view that he should express a degree of optimism over the US economy’s longer-term growth prospects, seeing that a financial shock, even on the scale of 2007-09, is not likely to influence the demographic and technological trends that are supposed to underpin growth,” said Lewis.
With inflation coming under control, Bernanke may now believe there is little more the Fed can do to boost US growth.
“All the same, it is almost three years since the trough of the downturn and the Fed Chairman would doubtless like to see some tangible evidence that the theory is working," Lewis said.
Bernanke attributed disappointing growth to the housing market and the stress in the financial system, factors he does not believe will hold back the economy over the medium term, according to Lewis.
Confidence in the financial sector's ability to adapt to reforms and medium term confidence in new technology and productivity formed part of his speech last week, as did his confidence in Europe.
“I have confidence that our European colleagues fully appreciate what is at stake in the difficult issues they are now confronting and that, over time, they will take all necessary and appropriate steps to address those issues effectively and comprehensively,” said the Fed chairman.
“He must find himself in a very small minority if that is what he believes,” said Lewis. “Indeed, the assumptions Mr Bernanke has to make in order to support his theoretically-based optimism on the US economy are nothing short of heroic".
“This is probably why he feels drawn to action. Though his faith in the theory may still be strong, it is being sorely tested. Besides, the unemployed stand as a living reproach to policymakers,” said Lewis.