Bernanke’s Ammo to Stay in the Fed’s Lockbox Posted on June 6, 2012

by MERRILL GOOZNER
The Fiscal Times
June 6, 2012

When Fed Chairman Ben Bernanke goes before the Joint Economic Committee Thursday to discuss the economic outlook, he’ll probably tamp down growth expectations for the remainder of this year. It’s not just the stumbling stock market or last week’s mediocre jobs report driving concerns.

He’ll lament the headwinds from Europe and that lack of coordinated intervention on the continent. He’ll point to the slowing economies of China and India. He’ll talk about the failure of policymakers to clean up the foreclosure mess andstabilize underwater mortgages, which would help resuscitate the housing market.

But don’t expect the Fed to act.

He won’t reach into his monetary toolbox to protect the U.S. from those headwinds, even though he has plenty of options. There won’t be a third round of Fed purchases of government bonds and mortgage-backed securities, sometimes known as quantitative easing. Bernanke won’t signal an interest in seeing prices edge up at a little faster pace. And he certainly won’t signal the Fed is about to intervene in the European bond markets (yup, it could do that, too), which could help the beleaguered countries of the Eurozone’s southern tier stabilize their finances as well as help U.S. exporters.

It’s not just monetary hawks like Richard Fisher of the Dallas Fed who are opposed to more monetary easing, claiming it will spark inflation down the road. They opposed the first two rounds, but only have three votes on the 12 member Federal Open Market Committee, and Fisher doesn’t even sit on the panel this year.

JUST SAY NO TO QE3
Bernanke’s closest allies on the FOMC are also opposed to immediate action. Sandra Pianalto, president of the Cleveland Fed, said Monday that the jobs report didn’t warrant further easing of monetary policy. St. Louis Fed president James Bullard, an alternate on the committee, is still predicting three percent growth this year. He told a Tokyo conference hosted by the Bank of Japan earlier this week that “I do think our most potent weapon as a committee is to do further quantitative easing, but if we take such action, we’d be taking more risk with our balance sheet. I think right now we’ve got the right trade-off,” he said.

Opponents of further quantitative easing are not just on the right and center, but on the left. James K. Galbraith, an economist at the University of Texas, noted that “quantitative easing adds money to bank balance sheets in return for other assets. This does not repair the value of homes, raise FICO scores (FICO is a publicly-traded company that tracks individuals’ credit ratings), create private income or increase loan demand,” he wrote in an email.

Paul Krugman and Lawrence Summers, two of the nation’s leading liberal economists, also said in recent speeches that the central problem facing the U.S. is lagging consumer demand caused by falling wages, the increased share of national income going to high-income individuals and corporate profits, and persistently high unemployment. From their perspective, it will require increased government spending (more stimulus) and progressive tax reform to restore long-term economic growth to more normal levels.

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