Neil Irwin reports on a somewhat changed tone from Ben Bernanke:
Though the Fed cannot solve those problems on its own, he said, “we must continue to do all that we can to ensure that our policies are helping to guide the country’s return to prosperity in an environment of price stability.”
Translation: I get that the economy is still in horrendous shape, and the Fed will keep doing everything it can to fix that, so long as we don’t think those steps will cause an inflation problem.
But I think the translation of the translation is that Bernanke “gets” that unemployment is sky-high, but doesn’t intend to step-up any efforts to do anything about it.
In models, it is easy to specify an announced future policy stance and assume the public believes the announcement. In practice, there is inevitably uncertainty about ex- actly how firm are commitments to future policy, even if the future policy is announced in detail…. Central banks in most developed countries have succeeded in convincing the public that they are committed to maintaining low and stable inflation. But this credibility has built up over decades as the central banks have acted to deliver on their commitment. In the presence of a binding ZLB, the result from the models is that the central bank ought to commit to expansionary future policy. A bank that has built up inflation-fighting credibility may find this is a liability if it tries to convince the public that it is temporarily committed to increasing the inflation rate. Announcements about future policy at a time when the short rates that ordinarily are seen as set by the central bank are stuck at zero are particularly subject to doubt, just because they are accompanied by no current action…
In other words, if Bernanke tried to raise expectations he might nonetheless fail. This seems like a reasonable concern to me, which is why I support both fiscal and monetary efforts. But I think it’s important to be clear on the fact that the Fed isn’t trying and failing to induce additional monetary stimulus, they’re not trying. Bernanke isn’t hobbled by a lack of credibility in his efforts to temporarily commit to increased inflation, he’s saying that avoiding inflation bounds what he’s willing to do to boost growth.