Yesterday, I wrote that if Federal Reserve Chairman Ben Bernanke really wants to earn Person of the Year honors, he needs to do more to fight unemployment. Contrary to Alan Greenspan’s assertions, the Fed does have some more unemployment fighting tools in its arsenal (and a legal mandate to maximize employment, in addition to assuring price stability).
Via Matthew Yglesias and Free Exchange, the Wall Street Journal posted responses to questions Sen. David Vitter (R-LA) collected and sent to Bernanke. And Bernanke’s answer to an inquiry from Brad DeLong shows that he is well aware that he could do more to boost employment, but he isn’t planning to:
The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed.
As Free Exchange put it, “I can’t imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.”
Bernanke’s nomination for a second term was approved by the Senate Banking committee today on a 16–7 vote, with six Republicans and Sen. Jeff Merkley (D-OR) voting against. While most of the rhetoric coming from those voting “no” had to do with the Fed’s lack of transparency or roll in the housing crash (both legitimate concerns), Merkley couched his criticism in terms of unemployment and a complacency towards Main Street. “Following our economic collapse, it is also apparent that [Bernanke] has not changed his overall approach to prioritizing Wall Street over American families,” Merkley said. Sen. Sherrod Brown (D-OH) made many of the same points as Merkley, but still voted for Bernanke.
As Yglesias put it, “unemployment is high in large part because the policymakers with primary responsibility for achieving full employment don’t want to use the tools at their disposal to achieve that goal.” Bernanke really needs to be pressed on why that is.