(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Martin Hutchinson
NEW YORK (Reuters Breakingviews) - Markets seem to hope Ben Bernanke will repeat last year’s performance. At the Jackson Hole conference in 2010, the Federal Reserve chairman announced his support for a bond purchase program. But circumstances have changed. When he speaks at this year’s conference on Friday, he should leave any further stimulus attempts to Congress. Fiscal action might be just as unhelpful as the monetary kind, but at least it’s easier to reverse.
With the consumer price index up 3.6 percent in the last 12 months and even the core measure rapidly approaching 2 percent year on year -- double the run rate a year ago -- it’s tough to claim deflation is the immediate threat it seemed last year. Furthermore, it’s increasingly hard to argue that still looser monetary policy will help get credit flowing to businesses. Interest rates for long-term Treasuries are already close to 50-year lows, and a shortage of cheap funding may well no longer be the problem.
In any case, the success of the Fed’s last quantitative easing program was mixed at best. In the quarter after its introduction, U.S. GDP growth slowed sharply, from an annualized 2.3 percent to 0.4 percent. That’s not necessarily cause and effect. But the last dose of QE medicine didn’t cure the ailment -- and the next is even less likely to be effective. Bernanke risks undermining the Fed’s credibility, and its independence, if further measures don’t obviously work.
Meanwhile the Fed’s balance sheet, now at $2.9 billion, has already expanded hugely. Slimming it down won’t be as easy. For instance, a rise in interest rates -- logical if inflation doesn’t subside -- could make it impossible for the central bank to sell many assets without crystallizing politically inconvenient losses.
Rather than come up with ways for the Fed to do more, Bernanke needs to point to Congress. Fiscal stimulus is a much more direct way of spurring economic activity, even if detractors rightly question its value unless carefully directed. But should such efforts fail, the politicians would take the blame. And fiscal stimulus could be reversed quickly, whereas unwinding Fed holdings could be slow and problematic.
Bernanke may worry that argumentative lawmakers won’t do anything. He could use his Jackson Hole platform to encourage them. But if he must set out actions the Fed could take, he would still do better to avoid actually taking any.
-- The Kansas City Federal Reserve’s annual symposium at Jackson Hole, Wyoming, begins on Aug. 25. Fed Chairman Ben Bernanke is scheduled to speak at the symposium on Aug. 26.
-- The Congressional Budget Office’s updated budget and economic outlook projected a federal deficit of 8.5 percent of GDP in the year to September 2011 but only 6.3 percent of GDP in the year to September 2012.
Editing by Richard Beales and Emily Plucinak