31. Fed Uncertainty Means Market Uncertainty
- Author:
- John H. Makin
- Publication Date:
- 05-2006
- Content Type:
- Policy Brief
- Institution:
- American Enterprise Institute for Public Policy Research
- Abstract:
- The new Federal Reserve chairman, Ben Bernanke, is making what cynics would call a serious mistake: he is being honest with the markets. The Fed is uncertain about the future path of U.S. growth and inflation. The most basic tenet of the theory of economic policy is that in circumstances of elevated uncertainty, policymakers should do less. Therefore, in his April 27 testimony to the Joint Economic Committee of Congress, Bernanke suggested that the Fed might start doing less: Even if in the Committees judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook [emphasis added]. The new Federal Reserve chairman, Ben Bernanke, is making what cynics would call a serious mistake: he is being honest with the markets. The Fed is uncertain about the future path of U.S. growth and inflation. The most basic tenet of the theory of economic policy is that in circumstances of elevated uncertainty, policymakers should do less. Therefore, in his April 27 testimony to the Joint Economic Committee of Congress, Bernanke suggested that the Fed might start doing less: Even if in the Committees judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook [emphasis added]. After its May 10 meeting, the Feds Open Market Committee reinforced the message of more uncertainty about the direction of the economy, saying: The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information [emphasis added]. Chairman Bernanke and virtually all of his colleagues on the Open Market Committee have made it clear, most forcefully in their May 10 statement, that they view the Federal Reserves most important mandated objective as one of maintaining low and stable inflation. A glance at any long-run chart of U.S. growth and inflation data clearly demonstrates the basis for this view. Since the early 1980s, when inflation was reduced and held to low and stable levels, U.S. economic performance has improved markedly. Growth has been higher and steadier; productivity growth picked up especially after 1995 and has remained higher ever since. Virtually all macroeconomic data have stabilized in a way that has reduced the duration and severity of recessions, so that the last recession (in 2001) was barely detectable. The Great Moderation is an often-used term that describes policymakers pride and satisfaction with the beneficial results of bringing down inflation and holding it at low levels.
- Topic:
- Economics, Government, Markets, and Monetary Policy
- Political Geography:
- United States