With economic indicators flashing red all over the place, the Obama administration may be looking at some bad news this spring on economic growth. If they’re looking to the Fed to toss them a lifeline, they may be waiting a while. Despite some expectations that the Federal Reserve might embark on a third round of quantitative easing, Fed chair Ben Bernanke announced yesterday that they will wait and see — and keep from causing any more damage:
Facing fire from the left and the right, Federal Reserve Chairman Ben S. Bernanke on Wednesday mounted a spirited defense of the central bank’s wait-and-see approach to the economy, arguing that his detractors fail to grasp the damage that could be done if the Fed were to prematurely take any new actions.
After its third policymaking meeting of the year, the Fed left short-term interest rates near zero on Wednesday and said it planned to hold them there until at least late 2014. As it has all year, the Fed continued to say that the economy faced headwinds but would gradually improve. Economic projections from senior Fed officials suggested the economy would grow a bit faster than anticipated early this year and the unemployment rate would come down a bit more than earlier thought, perhaps ending the year around 8 percent.
Bernanke attacked Paul Krugman for demanding an inflationary policy in order to produce a little more incentive for jobs growth. One would think that the two previous rounds of quantitative easing — which has weakened the dollar and helped drive energy prices higher — would be enough for any interventionist to love. Bernanke called Krugman’s demands “very reckless”:
Bernanke seemed to take most umbrage at Krugman’s critique, in the New York Times Magazine, which suggests that the Fed has refused to take action to help the out-the-work because it worries too much that such efforts can cause inflation. Economic theory holds that creating money to spur lending and drive economic growth — what the Fed does — tends to cause prices and wages to rise, but the Fed expects that inflation will come in at or below its target of 2 percent for the next few years.
“The question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate?” Bernanke said. “That would be very reckless.”
Not to mention ineffective. We’ve already had two rounds of quantitative easing. Has that solved unemployment? Spurred economic growth? Not at all. In fact, we’re heading into the third straight Stagnant Spring thanks to the incompetent and interventionist policies of this administration, the weakening of the dollar, and regulatory and tax environments which have predictably driven investors out of the market. Few of those who hold capital want to take risks in the US economy, thanks in large part to all of the uncertainties introduced by Obama’s team and all of the ad hoc interventions that keep taking place.
Bernanke did say that if the economy deteriorates significantly, the Fed would be prepared to intervene again. They don’t have much choice. The current administration won’t change course, and the only option Bernanke has is to take the helm and steer the ship away from the biggest icebergs. If the Fed has to do that a third time by essentially printing money, the temporary lift it provides to the economy will be far outweighed by the demonstration of Obama’s impotence and incompetence in economic policy.