Bernanke and Federal Reserve Are Reluctant to Stimulate the Economy

The Federal Reserve Chairman, Ben Bernanke, testified yesterday before the U.S. Senate. The message, in a nutshell, is that the Chairman is waiting for more clarity before he considers any new initiatives to stimulate the economy. A New York Times piece this morning presents an excellent recapitulation of Bernanke’s testimony, which I will refer to in this essay. 

The Fed boss made several profound comments, which I would like to highlight. The article indicated “he took seriously the Fed’s dual mandate to maximize employment and continue to control inflation.” Seemingly, this suggests that stimulus would be appropriate now as unemployment remains over 8% and the inflation rate is low. The index of consumer prices  in June rose 1.7%over the previous 12 months, and the same index excluding volatile food and energy prices rose 2.2% over the same period. 

The so-called fiscal cliff is looming; this is the possibility of higher taxes for all Americans and less spending by the federal government if Congress does not act to extend the Bush tax cuts before the end of 2012. Bernanke said this contingency “would probably knock the economy back into recession and cost a lot of jobs.” From my point of view, the Bush tax cuts, all of them, should be extended for another year. The economy is too fragile to decrease disposable income of any class of Americans at this time. 

He urged Congress “to adopt a plan that would limit any short-term changes in fiscal policy, while agreeing on long-term steps to reduce . . . the federal debt.” This is a very sensible recommendation. Alas, neither party in Congress seems willing to take the first steps to execute this outline of a plan before the elections. And so, the debate about spending vs. debt will continue unabated. 

Bernanke said he sees new signs of an economic slowdown. In particular, he mentioned manufacturing and business spending as well as the European crisis. Regarding the former, the combative environment created by the president in his class warfare comments is, without a doubt, causing top business people to defer spending and other new projects. The focus on what CEOs earn and the disparity between the rich and the poor is a longer-term debate that will not help America currently. 

The European debacle is taking a long time to resolve. Two observations are that the U.S. has not had a significant role in the deliberations and Germany will ultimately get austerity and increased political strength. Obama’s knowledge about financial matters is not considered to be his strong suit by the Europeans.

Bernanke seems “reluctant” to intervene at this time, although he is clearly concerned about the economy sliding back into another recession. One interesting point he made related to short-term rates, which the Fed could promise to keep near zero for the foreseeable future. This tactic would provide some certainty that the financial community is so desperate for. If short rates stayed low, it could have a marked impact on short-term investment by companies that could later evolve into longer-term spending strategies.

The political ramifications of Bernanke’s statements are crystal clear. The Obama administration has been benign relating to the economy. This phenomenon is to an extent impacted by a stubborn Congress, but, in any case, the administration should not be exclusively dependent upon the Fed Chairman to stabilize the markets; it should become more proactive, unless it is prepared to cede the election to the opposition.

I for one would feel much better about Obama if he would discuss his plans to improve the economy rather than continuing with his assault on Romney’s tenure at Bain Capital.