A Deepening Divide?

Last week the Washington Post raised expectations that the Fed was seriously considering additional policy action:

Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.

Yesterday nonvoter Richmond Fed President Jeffrey Lacker pushed back hard on those expectations:

Federal Reserve Bank of Richmond President Jeffrey Lacker said any consideration of further monetary easing by U.S. central bankers “is very far away.”

“It would take a very substantial, unanticipated adverse shock” for further steps at stimulus to be appropriate, Lacker told reporters today in Richmond. “Consideration of further easing steps is very far away.”

And note this morning I concluded with:

My concern is that policymakers will view a retrenchment in growth as a natural “pause,” simply a delay on the path the strong rebounds that have traditionally followed deep recessions.

This is not dissimilar to Lacker’s interpretation of the data:

“I’m comfortable with rates where they are now,” Lacker, who doesn’t vote on rate decisions this year, said today at the opening of an exhibit at the Richmond Fed on the history of the central bank. “You have some surges, some slower periods. It’s just going to be a choppy recovery.”

Interestingly, he appeared to be joined by Governor Elizabeth Duke:

Separately, Fed Governor Elizabeth Duke said in an interview with CNBC that the central bank is “in the right place” on its monetary policy and that she sees a “moderate recovery” taking place.

It sounds as if a battle is brewing within the Fed, with the Washington Post’s unnamed sources trying to keep monetary policy options open while another contingent is happy shutting down those options. Separately, Felix Salmon opines that the debate has already been decided:

Bernanke is a consensus builder, as Krugman knows, having been part of the Princeton economics department during Bernanke’s tenure as its head. And it may or may not make sense for the Fed to ease much more aggressively. But so long as that remains outside the general consensus, Bernanke’s not going to do it.

Salmon believes that Federal Reserve Chairman Ben Bernanke – a Republican – will not break from that party’s consensus that too much has been done already. Some of Bernanke’s defenders may find that paints a too narrow view of his motivations. But Salmon also notes that even Democrats are not eager for additional policy action. If the White House is not willing to push for more, why should Bernanke, especially when it will apparently require him to expend political capital internally?

If Salmon’s thesis is correct, it is a particularly sad outcome given Bernanke’s own words from 2002:

In short, Japan’s deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.

Politics could be every bit a problem in the United States as it has been in Japan. More to the point, it already is.

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