Too Cautious

One has to be struck by Mr. Bernanke's tentativeness at Jackson Hole about the need for renewed Federal Reserve quantitative easing. At a time when all the evidence points to a rapid slowing in the U.S. economy, Mr. Bernanke limits himself to exploring the Fed's options in the event that there were to be a further dramatic slowing in the U.S. economy.

Mr. Bernanke's excessive caution is to be regretted given the mounting risks of both a double dip economic recession and of Japanese-style deflation in the U.S. One would have thought that Mr. Bernanke should be anticipating the fact that the strong support that the U.S. economy has been receiving to date from the fiscal stimulus and from the inventory cycle is now due to rapidly fade. One would also have thought that Mr. Bernanke should be highly concerned about the strongest of headwinds that the U.S. economic recovery now faces from the appalling state of the U.S. labor market and from the ongoing foreclosure crisis.

Mr. Bernanke's excessive caution is to be regretted given the mounting risks of both a double dip economic recession and of Japanese-style deflation in the U.S.

The Federal Reserve's tentativeness about a new round of quantitative easing is all the more to be regretted since monetary policy is now the only game in town. The option of another round of fiscal stimulus anytime soon would seem to be precluded by the highly compromised state of the U.S. public finances and by the political cycle in the run-up to the November elections.

In mapping out the Federal Reserve's options, Mr. Bernanke is correct to emphasize that in principle there is very much more that the Federal Reserve can still do through aggressive purchases of both public and private sector debt instruments. However, one would have thought that before embarking on private sector debt purchases, the Federal Reserve should actively purchase U.S. Treasury bonds in general and U.S. TIPS in particular in order to drive down U.S. long-term government interest rates. By so doing, the Fed would also be driving down long-term private interest rates, which are linked to government borrowing rates. And it would do so without the associated risk of directly intervening in the private sector debt market.

To be sure, the Federal Reserve would be running risks in purchasing private sector debt instruments in the event that it was forced to do so. However, such risks would need to be weighed against the greater risk of having the U.S. economy find itself mired in a prolonged period of Japanese style deflation.

Desmond Lachman is a resident fellow at AEI.

Photo credit: Flickr user spakattacks/Creative Commons

Also Visit
AEIdeas Blog The American Magazine
About the Author



What's new on AEI

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
  • 16
  • 17
  • 18
  • 19
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Event Registration is Closed
Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Event Registration is Closed
Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.