The economy desperately needs a boost, but it’s not clear who’ll give it one. It won’t come from Congress, which is dominated by Republicans who seem eager to make matters worse. It won’t come from the White House, which can’t do much on its own. It won’t come from the private sector, which lacks customers and fears the near-future. And it won’t come from consumers so long as unemployment is at crisis levels.
And that leaves the Fed.
As Neil Irwin reports, the world’s central bankers will be in Jackson Hole, Wyoming, today for an annual conference, amidst “profound unease.” The U.S. economy is struggling badly and burdened by Wall Street volatility; Europe’s debt crisis has reached “a more ominous phase”; and China is pursuing an “anti-inflation campaign.”
It’s against this backdrop that Federal Reserve Chairman Ben Bernanke will deliver some closely-watched remarks today. He could present an agenda intended to lift the economy, but no one seems to think he will. Why not? Because as Paul Krugman explains, it appears the Fed chief “has been politically intimidated” by the right into “standing by while the economy stagnates.”
Last year, the Fed actually did institute a policy of buying long-term debt, generally known as “quantitative easing” (don’t ask). But it faced a political backlash out of all proportion to its modest effect on the economy, culminating in [Republican presidential candidate Rick Perry’s] declaration that any further monetary easing before the 2012 election would be “almost treasonous,” and that if Mr. Bernanke went ahead and did it, “we would treat him pretty ugly down in Texas.”
Now just imagine the reaction if the Fed were to act on the other and arguably more important parts of that Bernanke 2000 agenda, targeting a higher rate of inflation and welcoming a weaker dollar. With prominent Republicans like Representative Paul Ryan already denouncing policies that allegedly “debase the dollar,” a political firestorm would be guaranteed.
Outside political pressure isn’t the only problem contributing Fed inaction. Bernanke also has to contend with Fed leaders who are more concerned about inflation than a recession.
But it’s the breakdown of American politics that seems to be the biggest hindrance. As Mark Thoma noted, “The Ron Pauls in Congress looking for a reason to attack and take away the Fed’s powers, the criticism from many on the left for all sorts of things, etc., etc., puts the Fed in a more precarious political position than they ever expected to be in, and the fear of making a mistake and losing independence is tying its hands. The Fed values independence first and foremost, and it is unwilling to put that in danger. Thus, the Fed is trading more unemployment now for less in the future, and it’s mainly the political environment rather than economics that is driving this decision.”
Bernanke may surprise us, of course, but at this point, optimism is in short supply.