Bernanke’s fiscal focus
Ben Bernanke’s testimony to Congress today starts with 7 paragraphs on general economic conditions, continues with five more paragraphs on the state of the financial sector, and then has six important paragraphs on fiscal policy. Finally, at the end, he spends one paragraph talking about what the Fed is doing in terms of monetary policy and quantitative easing.
This is reasonable enough: after having hit the zero bound, there’s not much which can be said about monetary policy, and fiscal policy is going to be the main driver of America’s standing in the international financial markets going forwards. What’s more, for the past couple of years the Fed has been working hand-in-glove with Treasury: the distinction between fiscal and monetary policy, and the independence of the central bank, have gone by the wayside (quite properly, I might add, contra Angela Merkel) in a time of crisis.
Still, it’s a little disconcerting to see the Fed chairman talk so freely about fiscal policy: now we’ve reached this point, it’s going to be hard to stop him talking this way, even after the crisis is over. And the distinction between the Fed chairman and the Treasury secretary is a useful one, which really should be maintained.
Update: James Pethokoukis, for one, seems to think that the Fed’s actions are divorced from the Obama administration’s economic policy. It’s not clear why he thinks that.
Update 2: Mohamed El-Erian sees the emphasis on fiscal policy as an attempt “to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration”.