The Fed’s Words Will Matter More Than Its Deeds

Ben Bernanke fades into the shadows.

Photo by Brendan Smialowski/Getty Images

The Federal Reserve is meeting today and will decide on whether to begin “tapering” bond purchases this month or leave the timing up to Janet Yellen next year. Both my instincts and my jerking knee tell me to dislike tapering, but a lot of leading authorities are on the other side. So I’m ambivalent. But more than ambivalent, I don’t think it really matters all that much.

This is a weird case where words will speak louder than actions.

Here’s what I want the Fed to say: Sometimes there are short-term trade-offs between inflation and growth, and right now we are much more concerned about growth than inflation. Indeed, slightly higher inflation that brought us closer to our target would be welcome in its own terms. Above-target inflation is, by definition, not that great. But under the circumstances we would happily tolerate some above-target inflation for a while if that’s what it takes to get firms investing, houses built, and people employed. Every month that passes in which the unemployment rate is elevated is another month not only of temporary human misery but of long-term damage to the American economy which is threatened by a shrinking, de-skilling workforce. Everything that we do in 2013 is going to be about closing that jobs gap. We don’t think inflation will spike, but we can’t absolutely promise you that it won’t. All we can promise you is that if it does, we won’t really care unless full employment’s already been achieved.

Now the Fed’s not going to say that. But it is going to say something. And what it says will really matter a lot. Is it signaling a redoubled focus on growth? Is it establishing 2 percent as a symmetrical target? Or is it establishing a ceiling? Is it pleading futilty?