A year ago, in April of 2011, Ben Bernanke gave his first press conference. I wrote it up for the American Prospect here. Looking back, I had flagged that more of the questions asked Bernanke whether he was doing too much, rather than too little, to stimulate the economy. I noted:
the press conference, roughly nine questions worried about inflation, a weak dollar, the country’s S&P rating, oil prices, and whether the government can fashion an appropriate response to the financial crisis or long-term unemployment at all. These all reflect the worry that government is doing too much instead of too little. Meanwhile, there were only two questions asking why the Federal Reserve wasn’t doing more to lower unemployment. When Binyamin Appelbaum asked, “Is it in the Fed’s power to reduce the rate of unemployment more quickly? How would you do that? Why are you not doing it?” it was almost out of place.
That wasn’t the case today. The questions were much harder and more frequently about why Bernanke wasn’t doing more to get the economy going. They took for granted, as the first questioner pointed out, that “unemployment is still high, the economy is slowing, inflation is subdued” and Bernanke and the FOMC is, to their critics, “still being too cautious.” I count, on a quick scan, five questions related to the idea that the Federal Reserve has the ability to do more and is choosing not to do it, with only two more related to concerns of inflation hawks or a “bond bubble.”
There’s a lot of reasons for this: the wasted year of 2011 for the economy, the continued low interest rates of the United States even after a ratings downgrade, growing fears of a permanent decrease in the labor force participation rate and hysteresis, and more. But part of this change is the result of the economics blogosphere pushing the debate about monetary policy at the zero-lower bound into the mainstream of financial and economics journalism. The econoblogsphere should be proud of itself, and I will try to do more to advance this important conversation to whatever extent I can.
A year ago I held an event for the Roosevelt Institute on the Future of the Federal Reserve. It was the same day as the Bernanke press conference, and as such we asked each of the participants to ask Bernanke a question, and we put them online. Matt Yglesias’ question was: “I would ask him about his own paper on self-induced paralysis in Japan and what he has changed his mind about since then.” This change from Ben Bernanke the professor who called for aggressive monetary action to the Ben Bernanke we see now must have been on the minds of all the reporters in the room, as it is the subject of a great Krugman New York Times Magazine article this upcoming weekend. The question finally got asked by Binyamin Appelbaum, who, as we note above, asked the hardest question about the Fed not doing enough a year ago at the first conference. Bernanke’s full answer:
Binyamin Appelbaum: Unemployment is too high and you said you expect it to remain too high for years to come, inflation is under control and you expect it to remain under control. You said you have additional tools available for you to use, but you’re not using them right now. Under these circumstances, it’s really hard for a lot of people to understand why you are not using those tools right now. Could you address that? And specifically, could you address whether your current views are inconsistent with the views on that subject you held as an academic.Ben Bernanke: Yeah, let me tackle that second part first. So there’s this, uh, view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time. To the Bank of Japan, the first was that I believe a determined central bank could, and should, work to eliminate deflation, that it’s falling prices. The second point that I made was that, um, when short-term interest rates hit zero, the tools of a central bank are no longer, are not exhausted there, are still other things that, um, that the central bank can do to create additional accommodation.Now looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a moderate risk in late 2010, we used additional balance sheet tools to return inflation close to the 2% target. Likewise, we’ve been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the, the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that, Japan was in deflation and clearly, when you’re in deflation and in recession, then both sides of your mandate, so to speak, are demanding additional deflation.Why don’t we do more? I would reiterate, we’re doing a great deal of policies extraordinarily accommodative. You know all the things we’ve done to try to provide support to the economy. I guess the, uh, the question is, um, does it make sense to actively seek a higher inflation rate in order to, uh, achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very, uh, uh, reckless. We have, uh, we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable, in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a, [indiscernible] expectations or destabilization of inflation. To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do.