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Friday, October 28, 2005

Will Bernanke Speak Up?

With many calling for Bernanke to speak out on issues that impact monetary policy, including fiscal policy issues, what are Bernanke's views on this?

Fed Nominee Says He Will Avoid Fray Of Politics, by Nell Henderson, Washington Post: Ben S. Bernanke urged Congress ... to reduce the federal deficit, cut government spending and make ... recent tax cuts permanent. Bernanke was speaking then on behalf of the president, as his top economic adviser... But was he also expressing his own views? ... Some lawmakers and interest groups quickly invoked Bernanke's recent comments in favor of extending the tax cuts as signs of the policy prescriptions he would offer as Fed chief. But Sen. Charles E. Schumer (D-N.Y.) said such assumptions are wrong. Bernanke assured Schumer ... he was speaking to the congressional committee as chairman of Bush's Council of Economic Advisers and that he hoped to avoid such policy debates during his confirmation process and at the Fed... Bernanke ... indicated that he would prefer to limit his future public comments mainly to Fed policy... "I told him he should rethink that," Schumer said. "I would encourage him to be a positive force for deficit reduction." ... Bernanke has said in the past that the Fed has a role in budget debates when the outcomes would affect the well-being of the national economy and financial markets. The Fed "has the responsibility to be a nonpartisan adviser on general matters of macroeconomic and financial stability," Bernanke said in a June 2004 interview published by the Fed bank of Minneapolis. "So to the extent that deficits and debt are threatening macroeconomic and financial stability, the central bank is one actor that can provide advice and counsel to the fiscal policymakers."

While that sounds reassuring, the qualifier "to the extent that deficits and debt are threatening macroeconomic and financial stability" is important. At what point does Bernanke believe the debt becomes threatening? My impression is that he does not believe the current debt level crosses that threshold. If so, where is his threshold? I also do not believe the Fed chair should be a "positive force for deficit reduction" per se. Deficits and fiscal policy should be discussed by the Fed chair only to the extent that they affect monetary policy. And finally, I'm not sure Bernanke's personal views are as important as implied in the article. When he says:

"the general approach of inflation targeting is fully consistent with any set of relative social weights on inflation and unemployment; the approach can be applied equally well by "inflation hawks," "growth hawks," and anyone in between."

The use of the term "relative social weights" is an indication of his recognition that the Fed is a steward of the public, business, and banking interests, not the personal interests of Ben Bernanke. For that reason, his personal views are less important than his views of how to best represent these interests using monetary policy and the Fed chair's pulpit.

    Posted by on Friday, October 28, 2005 at 01:11 AM in Budget Deficit, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


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