Ben Bernanke’s big speech at Jackson Hole effectively closes the door on more monetary stimulus. As Greg Sargent points out, he is clearer than he’s ever been about the negative effects of congressional howling, diddling, and press-conferencing over debt negotiations. But Bernanke is probably the only man in America with the power to enact some sort of fiscal stimulus outside of congressional purview. And he seems to acknowledge this.
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view–the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.
Okay. Minimizing unemployment. Sounds good. How can the Fed do that?
In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.
We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.
Shorter Bernanke: We are not going to try more monetary stimulus. What does he ask for instead? “U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time.” How are we supposed to read that if not as a call for Congress and the president to have more negotiations about debt, except maybe with a little less screaming this time?