More evidence that Bernanke is a dove

More on the endlessly interesting Bernanke press conference:

Robin Harding: Robin Harding from the Financial Times. Mr. Chairman, while I look at these forecasts for 2014, the median of the forecast is I think 0.75 and the mean is 1.12 percent. If I were to draw a line for these–these dots, how should I draw it so I best understand what the FOMC is most likely to do?

I expected Bernanke to dodge the question.  He’d emphasized elsewhere that these were just forecasts, and when the time came the Fed would have to look at current data.  (After someone pointed out that 11 of 17 favored increased rates by late 2014, despite high unemployment.)   And he’d talked about why the names attached to each forecast were being kept secret. But he did answer the question:

I guess my suggestion would be to look at the median, the middle of the–of the distribution because we do have a democratic process in the Committee, and so the median will give you some sense of where the weight balances against the higher–in favor of higher or lower–lower rates. Again, we did note that in support of our assessment of late 2014, which is a Committee decision and of course there was a 9 to 1 vote in favor of that, but that is supported by the observation that 11 of the 17 participants expect the funds rate at the end of 2014 to be 1 percent or less.

Bernanke also mentioned that he wasn’t going to be around forever.  Thus this policy was institutional, and not contingent on whether he remained Fed chairman.

.  .  . at some point there’ll be a new Chairman, but there’s a lot more continuity on the FOMC collectively. The average bank president is on the FOMC for as much as 10 years and governor’s terms are 14 years. So, even as the Chairman changes, much of the FOMC remains continuous. So, as we talk about interest rates in 2014, the fact that there is quite wide ranging agreement that interest rates will be low for a long time, it should give you more confidence that that’s not dependent on a single individual.

Overall, I thought Bernanke went out of his way to suggest that Fed watchers should focus on the more dovish views, the preference for low rates in late 2014.  He also emphasized that the Fed wasn’t an inflation targeter, but rather put equal weight on the dual mandate:

Greg Ip of The Economist. Mr. Chairman, the Fed’s statutory goals are price stability and maximum employment but traditionally, the Fed has interpreted that somewhat flexibly in the sense that if there was a conflict between the two, they would push for price stability rather than for employment on the view that overtime, stable prices was the best contribution monetary policy could make to maximum employment. But today, you went to some pains to say actually, you treat these goals, put them on in equal footing and that there might be circumstances in which you put one above the other. So following up a little bit on Binyamin question, do I take it that if inflation were to move somewhat above your 2 percent preferred level that you would tolerate that in order to make for the progress on unemployment?

Chairman Bernanke: Well the period of time, yes we treat them symmetrically.

At various times Bernanke observed that even if the economy continues on its current path, there is a strong case for additional stimulus:

But I would say that, as I’ve said on several–in several answers, that if recovery continues to be modest and progress on unemployment very slow and if inflation appears to be likely to be below target for a number of years out so the configuration we’re talking about in the projections then I think there would be a very strong case based on our framework for finding different additional tools for expansion–for expansionary policies or to support the economy.

On the question of the fiscal multiplier, his press conference provided support for both views.

1.  On the side of a positive multiplier, Bernanke noted that zero interest rates would still be appropriate with an even stronger economy.  That could be viewed as implying that monetary policy is currently too tight.  He did note that there were some risks associated with unconventional policies.  I inferred that he saw these “risks” (which I don’t see as being real) as being one factor holding the Fed back.  So perhaps the fiscal authorities could do something without triggering a monetary tightening.

2.  However Bernanke also made a number of statements that cut the other way.  He repeatedly emphasized that they’d be watching the economy closely over the coming months, and the Fed would provide additional stimulus if the indicators weren’t satisfactory.  He kept emphasizing that they take their dual mandate seriously, and that unemployment is too high by any reasonable estimate of the natural rate.  Also that inflation is likely to remain low.  The takeaway for me was that Bernanke made it quite clear that he feels the Fed needs to be active, and how much they do depends on the state of the economy.  That implies a near-zero multiplier.  Or at the very least, that the multiplier is considerably lower than the figure implied by Keynesian models.

I suppose in this sort of situation one’s outlook depends on one’s priors.  It seems to me the obvious solution is simple; do a employer-side payroll tax cut.  ( I recall Christy Romer recommended this idea.)  That boosts AS, and forces the Fed to do additional monetary stimulus to prevent the rate of inflation from falling.  Bernanke was quite clear that below 2% inflation was unwelcome.  The employer-side cut is the one form of fiscal stimulus that works in theory, under either of the two interpretations discussed above.

Of course neither party favors an across the board cut in the employer-side payroll tax, so it won’t happen.  Only places like Singapore do that sort of sensible policy.

He also agreed with Milton Friedman that the best way to produce higher interest rates for savers is with an expansionary monetary policy:

So I think what we need to do as, is often is the case, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and to increase growth and that in turn will lead ultimately to higher return across all assets for savers and investors.

In contrast, the Bank of Japan has tightened policy almost every time inflation rose above zero, and ended up with nearly 2 decades of ultra-low rates.


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13 Responses to “More evidence that Bernanke is a dove”

  1. Gravatar of Benjamin Cole Benjamin Cole
    26. January 2012 at 16:48

    Fascinating commentary by Sumner.

    So can Bernanke get aggressive? I sure hope so. He is dithering and mumbling, compared to the need. He ain’t no Volcker.

    Egads. Central bankers have decided the psychic income derived from zero inflation trumps the real income you get from more-robust real growth.

    The theo-monetarists and econo-shamans chant verse about the virginal virtue of crisp new bills in a deflationary environment–money as a store of savings and ecumenical sustenance! A type of monetary asceticism is ascendant now in some monetarist circles, in which we must sacrifice to obtain the higher (and transcendent) goal of zero inflation, or nirvana itself, slight deflation.

    Myself, I am secular. I prefer material wealth and income. On dollar bills it may say “In God We Trust,” but that does mean we have to worship money or gold.

    Please Bernanke-san, print more money. Let’s worship at church, not the bank.

  2. Gravatar of marcus nunes marcus nunes
    26. January 2012 at 17:17

    Neither Dove or Hawk, just a “coward”!

  3. Gravatar of Benjamin Cole Benjamin Cole
    26. January 2012 at 18:13

    Also, I have begged fellow Market Monetarists not to use the word “dove” to describe the aggressive bullish monetary policy that we need. Right away, we lose the argument with the word “dove”…we are the weaklings, without resolve to steel our way to price stability.

    Say instead that Bernanke is struggling to find his inner Chuck Norris, the strength he needs to become to growth what Volcker was to price moderation.

  4. Gravatar of Jim Glass Jim Glass
    26. January 2012 at 18:39

    If Ben’s a “dove” that could be the problem.

    Too bad he doesn’t have claws to scratch the eyes out of and skin off of some of the hawks.

  5. Gravatar of ssumner ssumner
    26. January 2012 at 19:08

    Marcus, Can’t he be both?

    Ben and Jim, I agree.

  6. Gravatar of JimP JimP
    26. January 2012 at 20:42

    I think in part Bernanke is not a Chuck Norris because he just is not. He is a quiet university professor and he is not fond of conflict in the way Volcker was.

    I think he is also frightened. He fears inflation more than unemployment because – first there is no communist movement now to make the government fear mass unemployment the way Roosevelt did – and second because the Republicans might well win the election and if they do and if Bernanke has produced 4% (lets say) inflation by time of the new Presidential Inauguration the new Republican president and Congress might either impeach him or remove the independence of the Fed. I read both Romney and Gingrich (the Mutt and the Nutt) as promising to give us real deflation just as soon as they are elected. I think Bernanke is hoping the markets will do the work for him because he does not think he has the political strength or Presidential backing he needs to do it himself.

  7. Gravatar of Tommy Dorsett Tommy Dorsett
    26. January 2012 at 20:45

    I guess we’ll now figure out if the Woodfordian exit from the zero rate trap – promise to keep rates low even after the economy has recovered, and level targeting inflation — will work. NGDP level targeting it ain’t, but I think this was nonetheless a big step for Bernanke. He basically raised the inflation target a smidge, by adopting a 2% goal (versus the 1.75% implicit target before). He further implied level targeting by suggesting inflation could overdhoot for a time if it were helpful in lowering unemployment faster. And finally, the door is wide open to more asset purchases (blance sheet expansion) if the economy falters in the near term. Also, isn’t the 2014 commitment tantamount to implying more of the base is semi-permanent than before? And doesn’t this imply higher expected future NGDP….and hence faster AD? Just sayin’…..

  8. Gravatar of Bonnie Bonnie
    26. January 2012 at 21:24

    I saw the second half of the press conference, and somehow I didn’t hear anything different. Bernanke is still playing both sides of the fence, still saying the Fed will do something if the situation deteriorates – and I want to know. How bad does it have to get? How long does this guy have to say the same things over and over again while “Rome burns” before the excuses just get worn out? Geez there are only so many variations on “Let them eat cake” and I think he has used nearly all of them. When is someone going to ask when they’re going to do the right thing – just cut to the chase – and expect an explanation why they are taking ~1% inflation target and baking it into Fed continuity when there is obviously not enough demand generated to keep the economy healthy.

  9. Gravatar of ssumner ssumner
    27. January 2012 at 05:56

    JimP, I think that’s just pandering from the GOP. They’d put someone like Mankiw on the Fed, who has favored slightly easier money. They’d want to be re-elected.

    Tommy, As you know, I am a bit skeptical of the Woodford proposal, but in fairness to Woodford I don’t think they’ve gone “all in.”

    1. It’s still not really level targeting.

    2. They plan to begin raising raises around late 2014, when the economy is still quite depressed.

    Nevertheless, I think you are quite right that this is more Woodfordian than before, so I think people will be watching to see what happens.

    I don’t take a “wait and see” approach, but rather look at market responses. The market verdict is already in; a modest plus, but not a game changer.

    As far as NGDP, I don’t see a big effect, because the Fed didn’t opt for level targeting. The slightly stronger commitment to keep inflation from falling below 2% should raise NGDP expectations modestly. Again the market reaction seemed modest, although in fairness some of the market response had occurred before the announcement (on expectations) so I’m not quite sure how strong the reaction was. The Fed’s done a series of things since August 2011, when fears of a double dip recession were widespread. It’s not clear whether those fears have eased because of Fed activism, or because of dumb luck. Probably a bit of both.

    Bonnie, I agree it wasn’t dramatically different, but I heard a more dovish Bernanke.

  10. Gravatar of StatsGuy StatsGuy
    27. January 2012 at 07:58

    So let’s take Bernanke at face value here:

    “that if recovery continues to be modest and progress on unemployment very slow and if inflation appears to be likely to be below target for a number of years out ”

    Those are all AND statements. Let’s pretend this is a logic problem. This is dovish?

  11. Gravatar of Secondary Sources: Dovish Bernanke, Fed Market Movers, Household Formation – Real Time Economics – WSJ Secondary Sources: Dovish Bernanke, Fed Market Movers, Household Formation - Real Time Economics - WSJ
    27. January 2012 at 08:33

    [...] [...]

  12. Gravatar of Stocks Alert Today » Secondary Sources: Dovish Bernanke, Fed Market Movers, Household Formation Stocks Alert Today » Secondary Sources: Dovish Bernanke, Fed Market Movers, Household Formation
    27. January 2012 at 18:56

    [...] –Dovish Bernanke: Scott Sumner combs through the Fed press conference and sees evidence of a dovish chairman. ” Overall, I thought Bernanke went out of his way to suggest that Fed watchers should focus on the more dovish views, the preference for low rates in late 2014. He also emphasized that the Fed wasn’t an inflation targeter, but rather put equal weight on the dual mandate… At various times Bernanke observed that even if the economy continues on its current path, there is a strong case for additional stimulus.” [...]

  13. Gravatar of ssumner ssumner
    28. January 2012 at 06:07

    Statsguy, Yes, that’s debatable. But all those things will happen, so I think he’ll be voting to ease. (Obviously not as aggressively as I’d like–which is my big criticism of Bernanke–I think the risks lie with too little easing.)

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