Bernanke’s Do-Nothing Plan

The Fed chairman’s grand scheme not to do anything about unemployment, GDP growth, and gas prices.

Federal Reserve Chairman Ben Bernanke. Click image to expand.
Ben Bernanke

If you are a trader, a bond investor, or a central banker, you probably think that Federal Reserve Chairman Ben Bernanke’s first scheduled press conference went great. The professorly Bernanke—seated behind a piano-sized table a comfortable distance from the soft-balling journalists—seemed calm, if not confident. He did not say anything stupid, strange, or newsworthy. The markets, as hoped, said, “Whatever.”

If you are the average person on the street, though, the conference should have spooked you. Those who managed to suffer through heard Bernanke sympathize with the common problems of common people—things like rising gas prices and slow rates of job growth—but say that the Federal Reserve’s hands were tied. Three years ago, when the banks were in trouble, the Fed turned activist, dashing far outside its traditional purview to stabilize the economy and shock it into growth. But now, amid sluggish growth and a weak labor market, the Fed has become a Fed of limits.

Take gas prices. The average American is paying $3.89 a gallon, up from $2.89 just a year ago. Bernanke showed sympathy, noting that “higher gas prices are absolutely creating a great deal of financial hardship.” But he described the problem as decidedly not his. “There’s not much the Federal Reserve can do about gas prices, per se, at least not without derailing growth entirely. … After all, the Fed can’t create more oil.”

Well, what about GDP growth? Bernanke mostly addressed the topic during his opening remarks, an elaboration of a Federal Open Market Committee statement released just before the press conference. He noted that the median “longer run” projections for output growth range from 2.5 to 2.8 percent. Those figures do not sound particularly good. The United States routinely saw 4-percent annual growth in the 1990s—and we weren’t catching up from a savage recession then. But growth, too, was described as outside the Fed’s jurisdiction: “determined largely by non-monetary factors, such as the rate of growth of the labor force and the speed of technological change.”

What about joblessness? Surely the Fed has something to say about that, given that full employment makes up one-half of the bank’s dual mandate? Bernanke said, “Progress toward more normal levels of unemployment seems likely to be slow.” He continued with this not-so-rousing call: “We’re going to have to, you know, continue to watch and hope that we will get stronger and increasingly strong job creation.”

Binyamin Appelbaum of the New York Times pressed him: What could the Fed do to bring the unemployment rate down, and why is it not doing it? Bernanke declined to name what the Fed has in its toolbox that might goose jobs growth. He instead described the bank’s current and past efforts to bring down the rate—dropping interest rates to zero, and buying trillions of dollars in bonds to further convince businesses to lend—as “extraordinary.” Moving onto the other, unnamed options would risk much-dreaded inflation: The “cost of that in terms of employment loss in the future …would be quite significant.”

Another journalist asked about long-term unemployment, a problem that Bernanke has repeatedly expressed concern about in speeches and testimony. Again, the central banker sounded worried. But he threw up his hands. “As the situation drags on and as the long-term unemployed lose skills and lose contact with the labor market or perhaps just become discouraged and stop looking for work, then it becomes really out of the scope of monetary policy,” he said. “At that point, job training, education, and other types of interventions would probably be more effective.” He continued: “We don’t have any tools for targeting long-term unemployment specifically.”

Only when discussing inflation did Bernanke admit the Federal Reserve’s power—in this case, its near omnipotence. “In contrast to economic growth and unemployment, the longer-run outlook for inflation is determined almost entirely by monetary policy,” he said. He described the conditions that would require interest-rate hikes and promised, “That will be the time that we need to begin to tighten”—probably in a “couple of meetings.”

Thus, on nearly every economic topic journalists raised, Bernanke stressed the Fed’s limits, rather than its capabilities. He argued that the Fed has little control over issues affecting the average person on the street at any given time. Sure, the Fed performed some heroics during the worst of the credit crisis. But those days are over.

Here’s the thing: Bernanke is right about the Fed’s specific limitations. The bank wouldn’t want to take on gas prices. Its specific responsibility is not to maximize growth, but to keep prices stable and unemployment low. The Fed can try to get businesses to borrow and expand, and therefore to hire more workers. But it cannot create 7 million jobs by any direct mechanism. And there is nothing that the Fed can do for the long-term unemployed specifically. Congress and the states have more and better resources for creating or subsidizing work for the 99ers.

But there are plenty of things the bank could do to goose the economy as a whole, with an eye to helping the labor market and the common man. The Federal Reserve could undertake a third round of quantitative easing, continuing to goad banks to lend to businesses and businesses to take the loans. It could start declaring varioustargets,” promising the markets that it would change policy to meet them, no matter what. It could stop paying interest on excess reserves—the extra dollars that some banks keep parked at the Fed. It could even charge banks for keeping the dollars there, incentivizing them to deploy them in the real economy. It could say that it now considers 3 or 4 percent inflation a safe amount, not 2 percent—allowing its easy-money policies to continue for longer.

Instead, the overwhelming message of the conference was that Bernanke is worried about and plans on stamping out inflation when it picks up even a little. On virtually every other front, he plans to do little or nothing. On unemployment, especially, that is particularly worrisome. It’s good that the markets shrugged at the press conference. But no regular citizen wants to hear her central banker say, “Whatever.”