Remainders: Bernanke’s Speech


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Taken literally, I don’t think Ben Bernanke’s speech last week made any sense at all. He described a hypothetical future situation in which the inflation rate gets lower and employment growth continues to be unsatisfactory. He said that in such a situation the Federal Reserve would attempt to increase aggregate demand and that he believed it would be successful in doing so. So far so good. He also said that currently the inflation rate is below what he regards as optimal and that currently real output is below what it could be. Given Bernanke’s stated belief in the possibility and desirability of monetary action to raise aggregate demand in the hypothetical scenario and his description of the current scenario, it’s clear that the Fed should act now to raise aggregate demand.

But it’s not going to happen.

I think the most reasonable way to read the speech is non-literally. Several FOMC members and Regional Fed Presidents who aren’t currently voting FOMC members are clearly agitating for tighter policy or, at a minimum, the status quo. The speech is incoherent because the Chairman is trying to put together a consensus that papers over existing divides. One can’t know for sure if current policy would be different if the Obama administration has acted more expeditiously to fill the still-extant Fed vacancies, but it seems plausible that it could be. I doubt that any political reporters in America are going to put “failure to prioritize Federal Reserve vacancies” high on their list of post-election “why the Democrats lost so many seats” articles, but the issue deserves very high placement in my view.