What Are the Central Bankers Thinking?
Ryan Avent calls for Ben Bernanke's head:
The threatened Fed: There is ample reason to feel that the recovery might be weak and jobless. Fed projections basically reflect this. The Federal Open Market Committee generally expects growth for the American economy in the neighbourhood of 2.5% to 3.5% in 2010, with the unemployment rate holding between 9.3% and 9.7%. Expectations for growth in 2011 and 2012 are higher, ranging roughly from 3% to 5%, and the FOMC believes that the unemployment rate might possibly fall as low as 6.8% by the end of 2012. That's five years after the onset of the recession.... Core inflation is forecast to reach no higher than 1.7%, even into 2012.
But the minutes reflect no inclination to do anything more than what has already been put in motion. Indeed, participants remain very concerned about how they'll pull back on their various interventions.... [I]t's hard to know quite what to say. There was some interesting writing last week on the subject of Fed independence and whether or not the central bank could actually generate some inflation, if it wanted to.... [T]he FOMC believes that it probably could... yet it will not, despite its own forecasts indicating that full employment—the maintenance of which is one of the Fed's primary goals—isn't likely to return for at least the next three years.
I noted last week that political control of monetary policy would inevitably lead to accelerating inflation. Central bankers seem to have warped this truth into its mistaken corollary—that price stability means never doing what political actors want, even if what they want is actually what's best. But now the Fed finds itself in a real bind. If it continues ignoring unemployment, then it may face angry legislators determined to rein in the central bank. If it agrees that taking more steps to try and engineer some inflation is a good idea, it may well be perceived to have given in to political pressure.
Another way to put this is to note that there's no avoiding the threat to Fed independence here; there is no safe path to protection of the sanctity of monetary policymaking. Given that, the best thing for the politicians to do may well be to try and put the central bank in a position where it feels confident enough to do the job it's actually supposed to do. And I think that means new blood. Replacing Mr Bernanke with someone publicly committed to focusing on all aspects of the central bank's mission...
Me? I can't see anyone I trust to better analyze central banking issues than Ben Bernanke. I would settle for the Federal Reserve's adoption of a formal 3% per year GDP deflator inflation target. Just saying.
