"Bernanke Warns That Spending Cuts Could Derail Growth"
I was pondering Scott Sumner’s argument yesterday that a true inflation-targeting regime from the Federal Reserve would imply extremely small fiscal multipliers. But it’s difficult to get around the fact that this cuts against the stated views of the Fed’s top official as well as all the staff economists I’ve ever heard from:
Federal Reserve Chairman Ben Bernanke warned Congress on Thursday that overzealous cuts to government spending could derail an already fragile recovery and said a U.S. debt default could wreak financial havoc.
“I only ask … as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery,” Bernanke told members of the Senate Banking Committee.
There are a lot of ways you can reconcile Bernanke’s view with Sumner’s, including by just saying that the Fed isn’t doing inflation targeting. But it sure would be nice to know what the Fed’s own theory is. The ambiguity around this is one of several reasons that I think it would be desirable for the Fed to have a clearer and less ambiguous mandate.