I heard much of the press conference (not all) and I must say that I thought Bernanke was far better than in the past. I initially underestimated the Fed’s move (in the previous two posts.) The markets may have initially made the same mistake; they rose further as they had more time to digest the new policy. Here are a few observations:
1. Bernanke emphasized that monetary stimulus is not like fiscal stimulus, it actually reduces the budget deficit. That’s right.
2. He said it was an 11 to 1 vote. The Fed is clearly behind him and hence the policy has credibility.
3. He kept talking jobs jobs jobs. And he emphasized that the Fed would do pretty much whatever it takes to get some progress on the employment front. Of course by itself that would be a bad policy. But when combined with the 2% inflation target (which he said had equal weight) it’s getting pretty close to NGDP targeting.
4. Speaking of NGDP targeting, Bernanke brought up the idea (without any prompting by reporters) and talked about Woodford’s plan for NGDP level targeting. He didn’t endorse it (how could he when the Fed only recently adopted a 2% inflation goal) but he certainly wasn’t critical of Woodford. I had the impression that if he wasn’t constrained by being head of the Fed right now, he’d be pretty sympathetic to Woodford’s proposal. And why do I have to call it “Woodford’s proposal?”
5. I’ve gotten a lot of criticism from people, even my friends in the blogosphere, for going too easy on Bernanke. Talking about how he’s well-intentioned, etc. I think this press conference shows that my comments were justified. A commenter named Mark C recently sent me a survey by Bloomberg that showed that the vast majority of economists did not think money was too tight, and only 1 out of 66 thought money was far too tight. Even though Bernanke is a Republican, he’s to the left of the mainstream of a profession that votes 70% Democratic. His call for doing whatever it takes to get more jobs was clearly sincere.
I’ve gotten a flood of comments and emails, and won’t have time to respond for several days.
PS. I notice that Twitter has an Evan Soltas tweet showing that the odds of Obama being re-elected rose on the news. Justin Wolfers wondered about the long and variable lags. My hunch is that Obama’s re-election odds are positively correlated with the S&P500. I.e. a rising stock market makes people more optimistic that things are getting better. Does anyone know if such a correlation exists?
PPS. Kudos to commenter Saturos, who seemed to be one of the first to notice the importance of what happened today.