Despite the predictions of investors and traders, Chairman Ben Bernanke announced in a speech Friday that he would not be proposing new steps by the Federal Reserve to help the economy. The reasons behind his inaction might be more political than monetary.
Many people worry that the United States is on the brink of another recession — a fear compounded by slowing consumer spending, falling home prices, large debt burdens, and uncertainty in Europe. Investors had hoped that the Fed would take decisive action to help the economy; but instead of offering a new stimulus plan, Bernanke criticized Congress’ actions in the debt ceiling debacle and said fiscal authorities should do more to help the economy in the short term. The stock market temporarily dropped with the news that the Fed would, for the time being, not be enacting new measures to help the economy.
Contrary to hopeful investors, Paul Krugman had predicted in an Aug. 25 New York Times op-ed that Bernanke would not offer a dramatic stimulus plan during the annual Fed gathering at Jackson Hole, Wyo. There are many logical steps the Fed could take to help the economy, but Bernanke is instead choosing to not take action. The interest rates the Fed would usually target are already near zero and cannot be cut more; however, Krugman writes that Bernanke could take bolder actions, including purchasing long-term government debt and seeking moderate inflation to encourage borrowing, that would stimulate the economy.
But with presidential hopefuls saying that issuing more money would be “almost treasonous,” as Rick Perry said in Iowa earlier this month, the Fed chairman might not be as apt to take such measures. According to Krugman, the Fed is “intimidated into inaction” by the political climate.
Krugman wrote, “I’m using Mr. Perry — who has famously threatened Mr. Bernanke with dire personal consequences if he pursues expansionary monetary policy before the 2012 election — as a symbol of the political intimidation that is killing our last remaining hope for economic recovery.”
Perry’s comments created a stir in the media, but the underlying sentiment isn’t unique to bombastic presidential hopefuls. According to Rick Wilson, a Republican strategist and the founder of Intrepid Media, the Federal Reserve has played a far too significant role in the economy already.
He said that he thinks average Americans would be more opposed to the Fed’s actions if they understood it better. “They’re uncomfortable with its role in the economy, but they don’t understand it,” he said. Wilson accused the Fed of “playing a lot of games to keep the banks afloat” instead of letting market forces sort out the economy.
According to Wilson, the Fed’s meddling has nonetheless failed to reach the “mythical trigger point” where the economy is in ideal shape. “If we can’t get there from spending well over a trillion dollars in four years, we’ve got to reassess that model.”
Fed supporters counter that Bernanke’s decisions have helped the economy so far. In last year’s speech, he proposed a Treasury-buying plan to help lower long-term rates, which, when enacted, lifted stock prices.
With recent news that the economy grew at an annual rate of just 1 percent this spring, many argue that the Fed should take greater action now instead of caving to political pressure from Perry and other Republicans. The speech did not deliver immediate help, despite the fact that Bernanke said that in the September meeting, the Fed “is prepared to employ its tools as appropriate to promote a stronger economic recovery.”
That might be true, but it is also possible that the Fed will continue to be paralyzed by the hostile political climate.