Another Federal Reserve policy meeting, another restatement of the QE3, another big rise on Wall Street. The breakdown on the Fed’s continuing to buy $85 a month in treasury bills was predictable, if generally wrong and leaving just about everyone to speculate on why, regardless of how plainly the case was made. Make no mistake about it, though – Ben is still in charge and things are going pretty well in many ways, at least until the showdown on the budget and debt ceiling.
Most of the reporting on the decision by the Fed centered on the relatively weak jobs showing in the official BLS numbers on job gains for August. It’s true that the gain of 167k jobs was less than spectacular, but the Fed knows better than to watch that noisy report month by month to set policy. Bernanke didn’t even mention it in the press conference he held after the policy announcement – it wasn’t even on the plate.
Instead, he spoke at length about two items the Fed is paying attention to – and for that reason we should all pay attention to them. They were low inflation and the risk of Congress doing something stupid.
Here is what Big Ben had to say about the risks ahead:
A government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy, and the Federal Reserve’s policy is to do whatever we can to keep the economy on course. And so if these actions led the economy to slow, then we would have to take that into account, surely. … That being said, you know, again, our ability to offset these shocks is very limited, particularly a debt limit shock, and I think it’s extraordinarily important that Congress and the administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills, and that we avoid any kind of event like 2011, which had, at least for a time, a noticeable adverse effect on confidence on the economy.
In other words – if Congress is unwilling to act, the Federal Reserve is. It is “extraordinarily important.” The Fed simply does not scold the government in public. Ben has told us that he’ll do his best if the government proves incapable of simply doing its job, but also made it clear that there is only so much he can do. Once again, the biggest threat to improvement in the economy comes from Washingtoon.
That’s not the only topic Bernanke spoke at length about in the brief presser. He laid out a “Three Part Test” for the Fed keeping interest rates near zero:
1) The unemployment rate remains above to 6.5%,
2) Expectations of annual inflation over the next two years do not exceed the Committee’s 2% longer-run goal by more than half a percentage point, and
3) Longer-term inflation expectations continue to be well anchored.
If you want to find a piece of data from August to explain the Fed’s action, the 0.1% inflation figure was the killer. Jobs? Bernanke himself said, “And in particular, one thing that’s been quite striking is that unemployment, we were too pessimistic on unemployment for this year.” With a target of 6.5%, the headline unemployment rate (U3) of 7.3% is getting rather close. If there was only more inflation, the Fed might have considered easing up on the net stimulus while it left rates at their historic lows.
So what should we take away from this action, or lack thereof? That the economy is not particularly weak but there is a significant risk pending that would make action unwise at this time. The rest of it is going quite well except for the fact that we are still in a regime where deflation is more of a risk than inflation.
And, of course, the stock market is more impressed with Bernanke’s magic money machine than they are with the ability of corporations to make a real profit, despite a strong year on the latter front. But hey, a party on the public dole is a good time for everyone, right?
Though Larry Summers has withdrawn his name for consideration to replace Ben we still don’t know that Janet Yellen is going to get the job, even if it looks more likely all the time. Warren Buffet recently gave his choice for Fed Chair – Ben Bernanke himself. That’s not because Ben just prints money all the time, it was because “Since the panic of five years ago, he’s done a terrific job.”
It’s good to give Bernanke his due, because he someone level-headed has to be in charge. Even if the Fed Chair sometimes seems like the only one doing his job.