More Evidence that Bernanke is a Dove

More on the endlessly interesting Bernanke press conference:

Robin Harding: Robin Harding from the Financial Times. Mr. Chairman, while I look at these forecasts for 2014, the median of the forecast is I think 0.75 and the mean is 1.12 percent. If I were to draw a line for these–these dots, how should I draw it so I best understand what the FOMC is most likely to do?

I expected Bernanke to dodge the question.  He’d emphasized elsewhere that these were just forecasts, and when the time came the Fed would have to look at current data.  (After someone pointed out that 11 of 17 favored increased rates by late 2014, despite high unemployment.)   And he’d talked about why the names attached to each forecast were being kept secret. But he did answer the question:

I guess my suggestion would be to look at the median, the middle of the–of the distribution because we do have a democratic process in the Committee, and so the median will give you some sense of where the weight balances against the higher–in favor of higher or lower–lower rates. Again, we did note that in support of our assessment of late 2014, which is a Committee decision and of course there was a 9 to 1 vote in favor of that, but that is supported by the observation that 11 of the 17 participants expect the funds rate at the end of 2014 to be 1 percent or less.

Bernanke also mentioned that he wasn’t going to be around forever.  Thus this policy was institutional, and not contingent on whether he remained Fed chairman.

.  .  . at some point there’ll be a new Chairman, but there’s a lot more continuity on the FOMC collectively. The average bank president is on the FOMC for as much as 10 years and governor’s terms are 14 years. So, even as the Chairman changes, much of the FOMC remains continuous. So, as we talk about interest rates in 2014, the fact that there is quite wide ranging agreement that interest rates will be low for a long time, it should give you more confidence that that’s not dependent on a single individual.

Overall, I thought Bernanke went out of his way to suggest that Fed watchers should focus on the more dovish views, the preference for low rates in late 2014.  He also emphasized that the Fed wasn’t an inflation targeter, but rather put equal weight on the dual mandate:

Greg Ip of The Economist. Mr. Chairman, the Fed’s statutory goals are price stability and maximum employment but traditionally, the Fed has interpreted that somewhat flexibly in the sense that if there was a conflict between the two, they would push for price stability rather than for employment on the view that overtime, stable prices was the best contribution monetary policy could make to maximum employment. But today, you went to some pains to say actually, you treat these goals, put them on in equal footing and that there might be circumstances in which you put one above the other. So following up a little bit on Binyamin question, do I take it that if inflation were to move somewhat above your 2 percent preferred level that you would tolerate that in order to make for the progress on unemployment?

Chairman Bernanke: Well the period of time, yes we treat them symmetrically.

At various times Bernanke observed that even if the economy continues on its current path, there is a strong case for additional stimulus:

But I would say that, as I’ve said on several–in several answers, that if recovery continues to be modest and progress on unemployment very slow and if inflation appears to be likely to be below target for a number of years out so the configuration we’re talking about in the projections then I think there would be a very strong case based on our framework for finding different additional tools for expansion–for expansionary policies or to support the economy.

On the question of the fiscal multiplier, his press conference provided support for both views.

1.  On the side of a positive multiplier, Bernanke noted that zero interest rates would still be appropriate with an even stronger economy.  That could be viewed as implying that monetary policy is currently too tight.  He did note that there were some risks associated with unconventional policies.  I inferred that he saw these “risks” (which I don’t see as being real) as being one factor holding the Fed back.  So perhaps the fiscal authorities could do something without triggering a monetary tightening.

2.  However Bernanke also made a number of statements that cut the other way.  He repeatedly emphasized that they’d be watching the economy closely over the coming months, and the Fed would provide additional stimulus if the indicators weren’t satisfactory.  He kept emphasizing that they take their dual mandate seriously, and that unemployment is too high by any reasonable estimate of the natural rate.  Also that inflation is likely to remain low.  The takeaway for me was that Bernanke made it quite clear that he feels the Fed needs to be active, and how much they do depends on the state of the economy.  That implies a near-zero multiplier.  Or at the very least, that the multiplier is considerably lower than the figure implied by Keynesian models.

I suppose in this sort of situation one’s outlook depends on one’s priors.  It seems to me the obvious solution is simple; do a employer-side payroll tax cut.  ( I recall Christy Romer recommended this idea.)  That boosts AS, and forces the Fed to do additional monetary stimulus to prevent the rate of inflation from falling.  Bernanke was quite clear that below 2% inflation was unwelcome.  The employer-side cut is the one form of fiscal stimulus that works in theory, under either of the two interpretations discussed above.

Of course neither party favors an across the board cut in the employer-side payroll tax, so it won’t happen.  Only places like Singapore do that sort of sensible policy.

He also agreed with Milton Friedman that the best way to produce higher interest rates for savers is with an expansionary monetary policy:

So I think what we need to do as, is often is the case, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and to increase growth and that in turn will lead ultimately to higher return across all assets for savers and investors.

In contrast, the Bank of Japan has tightened policy almost every time inflation rose above zero, and ended up with nearly 2 decades of ultra-low rates.

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