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Wednesday, September 28, 2005

Yellen, Bernanke, and Greenspan

The Fed continues to give strong signals that its primary concern is inflation as these comments from San Francisco Fed president Janet Yellen illustrate. She is also worried about the current account and budget deficits, saying in particular that budget deficits could send the economy on an unsustainable (inflationary) upward path. Finally she notes, as she has before, that monetary policy is not as good as fiscal policy at attenuating the impact of regional economic events:

Presentation to the members of Parliament at the Conference on US Monetary Policy, by Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, The U.S Economy and Monetary Policy: ...Obviously, at the forefront of everyone's mind are the two huge hurricanes that recently struck the U.S. Gulf Coast. The human tragedy following Katrina is enormous. ... The economic consequences for the region, of course, also are enormous. ... Staring into the face of such disasters, it is natural at first to want to use every tool at hand to try to help, including monetary policy. However, it seems clear that where monetary policy can make its greatest contribution is in keeping the national economy on an even keel. ... Instead, it's appropriate to use the tools of fiscal policy—especially government spending and transfers—to address the immediate crisis.

When Hurricane Katrina hit at the end of August, the economy was actually doing reasonably well. ... above-trend growth and diminishing slack [let] the FOMC ... lift its foot off the accelerator bit by bit, gradually removing the policy accommodation ... looking ahead ... Heading my list of risks to the economy in both the near and medium-term is energy prices. ... In addition to energy prices, the huge and unsustainable current account deficit and the budget deficit pose longer-term risks to the U.S. economic outlook. Indeed, the latter is even more of an issue now, with the massive rebuilding plans for the Gulf Coast. ... Higher energy prices put U.S. monetary policy on the horns of a dilemma. On one side, the negative impact of higher energy prices on spending tends to damp economic activity, which calls for a more accommodative policy, although in this case, the rebuilding effort will provide some offset. On the other side, it adds to inflationary pressures, which calls for a tighter policy. Although the effects of Katrina and Rita will remain uncertain for some time, it appears that the most likely outcome is a significant dip in growth in this quarter and the next, ... followed by a rebound in the first half of next year as the region rebuilds. ... Going forward, the Committee will certainly continue to monitor developments closely and weigh the options carefully. One option that is clearly not on the table is allowing an unacceptable rise in inflation. It has taken many years of consistent performance for the Federal Reserve to earn the public's confidence in its commitment to price stability. ... to maintain its credibility, the Federal Reserve must deliver—again and again–on its commitment to price stability.

Next, Alan Greenspan reissues his warning about not being fooled by recent financial market stability into underestimating risks, but he also makes an interesting statement about monetary policy. He believes that the economy is largely self-correcting, even more so in recent years, and that monetary and fiscal policy have often made things worse rather than better. This implies he believes that monetary policymakers should not try and anticipate and counteract short-run or medium-run movements in output through movements in the target federal funds rate, but should instead be focused on long-run output stability through price stabilization. He also believes that self-correction works best when the economy is competitive and free of government interference in domestic or foreign markets:

Exuberance always leads to asset drops-Greenspan, by Tim Ahmann , Reuters: Asset bubbles fueled by "market exuberance" invariably burst and policy-makers cannot safely pierce them, Federal Reserve Chairman Alan Greenspan said ... In a speech in which he once again defended the Fed's decision not to deflate the late-1990s stock market bubble, Greenspan said a successful monetary policy can be a victim of its own success -- by reducing economic volatility that in turn fosters greater risk-taking. He warned that protracted bouts of big risk-taking by investors are always followed by asset-price declines ...

"That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses often have come too late or have been misguided," he said." "It is important to remember that most adjustment of a market imbalance is well under way before the imbalance becomes widely identified as a problem," Greenspan added.

...[Greenspan] said "fostering an environment of maximum competition" was the best way to ensure economic flexibility. In that regard, he said it was important to ward off misguided efforts to try to protect jobs through trade protectionism and other competition-inhibiting policies. "Protectionism in all its guises, both domestic and international, does not contribute to the welfare of American workers," Greenspan said. "At best, it is a short-term fix at a cost of lower standards of living for the nation as a whole."

Finally, for the second day in a row saying much the same thing, Ben Bernanke, a former Fed Governor and now Chief White House Economic Adviser says what you would expect, things will turn down a bit in the short-run, but be fine in the long-run:

Impact of oil price still small: Bernanke, Reuters: High energy prices are a burden on households and could ultimately restrain economic growth but so far the impact has been modest, a top White House economic adviser said on Tuesday. "The U.S. economy is in the midst of a strong and sustainable economic expansion," Ben Bernanke.. said ... "The resilience of the economy ... is helping it to absorb the shocks to energy and transportation from the hurricanes," ... The short-term economic outlook remains dominated by Hurricane Katrina ... Bernanke said, joining other forecasters in looking for a hit to national rates of job creation and growth in the current quarter. Beyond that "recovery and rebuilding should ultimately increase growth rates and rates of job creation, perhaps by the fourth quarter and certainly in the first half...

UPDATE:  Make that the third day in a row, White House´s Bernanke: no big risk of recession.

    Posted by on Wednesday, September 28, 2005 at 12:45 AM in Budget Deficit, Economics, Inflation, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


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