Paul Krugman on the "Uncovery"
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Why Has the Federal Reserve Been Unwilling to Extend Itself to Stabilize the Path of Nominal GDP?

Mark Thoma speculates:

Ben Bernanke and the Washington Consensus: Bernanke does qualify his remarks about the Washington Consensus to include many of these objections. For example, he acknowledges that “best-performing” China and Korea used industrial policy to spur growth — and industrial policy is a large departure from the Washington Consensus — but he is nevertheless mostly dismissive of the industrial policy approach.

I am not saying that we should abandon free market principles entirely, or even mostly, or that the types of growth policies applicable to developing countries necessarily carry over to developed economies. The point is that the framework Bernanke adopted in his remarks is far more free-market oriented than the state of the literature, and this may tell us something about attitudes toward free market and self-regulation of financial markets within the Fed.

One final comment. There is a clue about the Fed’s hawkishness toward inflation in Bernanke’s remarks:

…many emerging market economies in the 1990s emulated the success of the advanced economies in the 1980s in controlling inflation…. Improvements in macroeconomic management have been particularly striking in Latin America, where large budget deficits and high inflation rates had produced costly swings in economic activity in previous decades.…

So Bernanke sees low and stable inflation as one of the keys to long-run economic growth, it avoids “costly swings in economic activity,” and from the Fed’s actions recently it appears that the Fed is reluctant to risk an outbreak of inflation. I don’t think this should be a worry, the Fed could be more aggressive now to try to help the unemployed, i.e. let inflation rise above target, without risking its long-run commitment to price stability. But apparently the Fed does not trust itself to bring down the inflation rate in the long-run if it allows it to rise in the short-run. I guess I have more faith in Bernanke and others at the Fed than they have in themselves.