Out of Control Policy Blog

Where the Fed is Heading

Fed Chairman Bernanke gave an important policy speech this morning at a Boston Fed event, laying out what he is seeing in the economy today. The speech was intended to provide some confidence boost for the market by giving a peek at what he and the Fed are likely to do at their next meeting (in November), though his comments were cryptic betraying the reality that there isn't full consensus inside the Federal Reserve as to what the government can do.

Real Time Economics broke down four key takeaways from the speech:

  1. Unemployment is way too high, and unlikely to fall much without some help from the government.
  2. Inflation is too low and unlikely to return to the Fed’s target of a bit below 2% without some help from the Fed.
  3. The first round of bond buying — aka Quantitative Easing — worked. There are risks to doing more, but they aren’t going to stop him from doing more.
  4. The Fed is thinking about publicly pledging to keep short term rates near zero for a REALLY long time.

It is unlikely, but the Fed's best move now would be to begin the process of exiting from its loose monetary policy, ending its subsidies for the market now, and letting the market shake loose once and for all the toxic waste that is part of our economic deluge. Unfortunately, the Fed view is largely to move the opposite direction, the debate is over how much and when.

But the Fed is going to do something, if only because Bernanke wants to help solve this problem:

Consumer spending in the quarters ahead will depend importantly on the pace of job creation but also on households' ability to repair their financial positions. Some progress is being made on this front. Saving rates are up noticeably from pre-crisis levels, and household assets have risen, on net, over recent quarters, while debt and debt service payments have declined markedly relative to income.1 Together with expected further easing in credit terms and conditions offered by lenders, stronger balance sheets should eventually provide households the confidence and the wherewithal to increase their pace of spending. That said, progress has been and is likely to be uneven, as the process of balance sheet repair remains impeded to some extent by elevated unemployment, lower home values, and limited ability to refinance existing mortgages.

See the whole speech here.

Anthony Randazzo is Director of Economic Research


« Case Against the Fed | Main | A Takeaway from the CBO… »




Out of Control Policy Archives