Free exchange | Monetary policy

Bernanke the unready

The Federal Reserve stands prepared to continue failing

By R.A. | WASHINGTON

BEN BERNANKE is on Capitol Hill today, providing his semi-annual commentary on the state of monetary policy. The backdrop for this testimony is as dark as it's been in some time. We would expect the American economy to manage trend growth in nominal output of about 5%, corresponding to about 3% real annual GDP growth and 2% annual inflation, give or take. In the 11 quarters since the end of the recession, NGDP growth has come in at more than a 5% annual rate only twice. In 6 quarters, by contrast, it's been below 4%. Keep in mind that the American economy fell dramatically below trend NGDP growth during the recession, and we would expect consistent above-trend growth during the recovery to make up some of the lost ground.

In the first quarter of 2012, NGDP grew at a 3.9% annual pace—below trend yet again. The slowdown in the second quarter seems to have been significant. Tracking estimates of output for the April-June period are now bumping around the 1% to 1.5% range. Inflation is tumbling. Taking headline CPI growth of 0% in the second quarter, we get an NGDP growth rate of no more than 1.5%, which would represent the single worst performance of the recovery if realised. Core inflation was positive for the quarter, so the true NGDP growth figure will probably be a bit higher. But the Fed's generally disappointing performance went from bad to worse over the course of the first half of 2012.

Mr Bernanke's testimony says as much:

The pace of economic recovery appears to have slowed during the first half of this year, with real gross domestic product (GDP) likely having risen at only a modest pace. In the labor market, the rate of job gains has diminished recently, and, following a period of improvement, the unemployment rate has been little changed at an elevated level since January...

With the unemployment rate expected to remain elevated over the projection period and ination generally expected to be at or under the Committee’s 2 percent objective, most participants expected that...the federal funds rate would remain extraordinarily low for some time...

In addition to projecting only slow progress in bringing down unemployment, most participants saw the risks to the outlook as weighted mainly toward slower growth and higher unemployment.

Mr Bernanke ought to be brimming with apologies for such miserable performance. Instead, he simply notes:

The Committee again stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability...

In its statement, the Committee noted that it was prepared to take further action as appropriate to promote stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

One might expect the chairman's Congressional audience to respond by saying, "Wait, the committee believes that it could take additional action and that such action would promote a stronger recovery and sustained improvement in labour market conditions? What in heaven's name are you waiting for? Why haven't you been taking additional action on an ongoing basis? Is it a question of incompetence or sadism or what? As elected legislators, we know policymaker failure when we see it, and this is extraordinary policymaker failure! But at least we can blame our abysmal performance on partisan polarisation and the filibuster! What's your excuse?"

They won't, of course. But they should.

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