What Bernanke didn’t tell us
Federal Reserve Chairman Ben Bernanke spoke to reporters for well over an hour at his quarterly press conference this week, but he was vague on the most important question of monetary policy today: what exactly would it take for the central bank to either ramp up or curtail the pace of monthly asset purchases? Since bond buys have effectively replaced interest rates as the dominant tool of Fed policy in recent years, the central bank’s new thresholds, which reference only rates, are not particularly useful.
After all, in the original threshold plan as crafted by its inventor, Chicago Fed President Charles Evans, the Fed would offer a jobless rate trigger for quantitative easing itself.
Asked about this during his briefing, Bernanke said:
We are prepared to vary that as new information comes in. If the economy’s outlook gets noticeably stronger we would presumably begin to ramp-down the level of purchases. But, again, the problem with giving a specific number is that there are multiple criteria on which we make this decision. We will be looking at the outlook for the labor market, which is very important. We will also be looking at other factors that could be affecting the outlook for the economy, for example – I hope it won’t happen – if the fiscal cliff occurs, as I have said many times, I don’t think the Federal Reserve has the tools to offset that event, and in that case, we obviously have to temper our expectations about what we can accomplish.
Likewise, as I said, we will also be looking at the efficacy and costs of our program and if we find that it is not working as well as we had hoped or if various costs are emerging that we had not anticipated then that would also have to be taken into account. We thought it was not constructive, because we ourselves are not sure what we would define as a substantial improvement, as long as costs and other considerations do not emerge, we are looking for something that is substantial, as far as a better job market.