Friday, October 15, 2010

Bernanke's Speech

After all the excitement from the FOMC minutes released earlier this week, Bernanke's speech was a bit of let down.  The FOMC minutes showed a number of participants had discussed explicit inflation, price level, or NGDP level targets as a way to better shape nominal expectations.  I was hoping for a follow-up from Bernanke today.  Instead, all we got was an acknowledgment of the obvious.  Others share a similar disappointment.  For example, here is James Politi:
Ben Bernanke, Federal Reserve chairman, did not satisfy everyone’s desires for a decisive, comprehensive, statement on what the US central bank will be doing to address the sluggish recovery in his speech today in Boston.
For instance, he did not even touch some of the more radical moves to tackle inflation expectations that were mentioned in the minutes from the last FOMC meeting in September, such as a nominal gross domestic product target or a price level target.
And here is Brad DeLong:
I am still surprised at the Fed Chair we have. Where is the Fed Chair who was willing to try to get ahead of the problems in late 2008? Or the "Helicopter Ben" of 2003? Or the student of big downturns in Japan in the 1990s and the U.S. in the 1930s.
I hope Bernanke is simply holding his cards close to his chest as cautious central bankers tend to do.  If so, it still is far from optimal. If Bernanke plays his cards right in shaping nominal expectations, a dramatic expansion of the Fed's balance sheet may not be necessary.  All he and the rest of the Fed have to do is state an explicit nominal target and say that they will do whatever is necessary to maintain that target.  This would create far more certainty and better focus the market expectations than the current approach of trying to divine the Fed's true intentions.  We see glimpses of this possibility with the pick up in inflation expectations following all the QE 2 talk by Fed officials. So make it official Ben, announce an official NGDP level target!

P.S. Sorry, I couldn't resist putting in another plug for a NGDP level target in the last sentence. 


  1. With the supply of base money so high, all the quantitative easing should have already been done. The problem is that markets don't believe it; they're acting like the Fed will withdraw the base at the first sign of inflation (or rising NGDP). Worst of all, I suspect they are right!

    To regain control of expectations the Fed needs to do something unexpected. It needs to begin a second round of quantitative easing and set a NGDP level target. If all goes to plan, the Fed shouldn't need to do much quantitative easing at all, because NGDP will rise by itself.

    The Fed is quite a scary institution. It's a wonder they have done so well over the last hundred years -- and I do not believe they have done well! The chairman of the Fed make monetary disequilibrium by merely showing up late for a conference.

  2. DB: Correct me if I am wrong, but I still don't think you have addressed Paul Kasriel's comment on how there would be a relationship between Fed instrument and nominal GDP.
    I think we had money demand blog guy (gal?) the other day say in effect "build it and they will come" but I think the more scientific among us might find that less than convincing.

    Nothing the Fed has done in the last 97 years would suggest we should have any faith in anything the Fed does. Am I wrong ? Is it not a continuous litany of error ?

    Let's repeat again, dramatic financial reform (and by extension political reform) is the only way we can "stop this sucker going down" to use the eloquent speech of George W.Bush.

    Yes, institutional reform is a big ask but as GMU economist Peter Boettke wrote a few days ago, it is not the job of the academic economist to work and think inside the box of the current matrix of institutions if better ones can be imagined.

  3. ecb,

    Agreed that financial reform is necessary for sustained private credit growth.

    However, we have public credit growth. The link between large-scale OMO and nominal spending is net Treasury issuance. In other words, indirect monetization. Why shouldn't this be capable of producing inflation? One counter-argument is that Japan and QE1 show that deficit monetization does not create inflation. I would argue that private sector credit was shrinking rapidly in both cases.

    In any case, monetization seems to occupy little attention in the QE debate. I am probably missing something here.

  4. Good post. We need to consider what has happened to Japan, and their tight money, strong yen policy.