In testimony to Congress on Thursday, Federal Reserve Chairman Ben S. Bernanke was careful not to commit himself to further monetary stimulus. We’re thinking about it, he said, presenting a minutely evenhanded review of the arguments for and against.
The Fed ought to get off the fence. At the next meeting of its policy-making committee on June 19-20, Bernanke and his colleagues should decide on a new program of monetary easing.
Things are rarely certain in central banking, but we think the case is stacked pretty strongly in favor of more quantitative easing -- the Fed’s unorthodox (and controversial) method for driving long-term interest rates lower by buying government debt. According to the Fed’s analysis, the economy is now growing too slowly to make significant inroads on unemployment. Jobs figures released last week were especially disappointing, suggesting another pause in what was already a painfully slow recovery. Revised figures marked down first-quarter growth in output.
What about inflation? It’s falling. Lower energy prices are helping. Long-term inflation expectations matter more -- they’re low and stable, and “the substantial resource slack in U.S. labor and product markets should continue to restrain inflationary pressures,” Bernanke said.
It’s crucial to note that risks in the outlook are tilted to the downside. Europe’s economic difficulties threaten to run out of control at any moment. U.S. fiscal policy is another danger. If the economy falls over the so-called fiscal cliff at year’s end, count on a second recession. If Congress heads that off, fiscal policy is likely to subtract demand from the economy next year. If Congress doesn’t head it off, that wouldn’t prevent the Fed from doing yet another round of QE.
If progress in reducing unemployment slows, temporary joblessness might harden into the structural, permanent kind. And if low inflation turned into outright deflation, this would worsen the debt burden that’s holding the economy back and make the Fed’s task vastly more difficult.
To sum up: Demand is growing more slowly than the Fed believed, inflation is falling below target, progress on unemployment is glacial, and the risks are loaded on the negative side. What’s the Fed waiting for?
Some of the central bank’s policy makers want more evidence that the new jobs slowdown isn’t just a blip. Views differ on how much labor-market slack exists, and if there is scope for expanding demand without pushing up prices. Most important, some Federal Open Market Committee members worry that unwinding the QE already undertaken won’t be easy, and they have a point. QE on this scale is uncharted territory, even before a third round begins.
In a speech on Wednesday, Fed Vice Chairman Janet Yellen reviewed these issues and, within the limits of central-banking propriety, made a strong case for further action. She stressed the unbalanced nature of the risks and explained that Fed research confirmed the effectiveness of QE in lowering long-term interest rates.
As for the idea that the exit from QE will be destabilizing, she said, “I disagree with this view: The FOMC has tested a variety of tools to ensure that we will be able to raise short-term interest rates when needed while gradually returning the portfolio to a more normal size and composition.”
If Bernanke urges a new round of QE at the committee’s next meeting, as we hope, he will probably have an ally in Yellen. He will need all the backing he can get, and not just on the Fed’s committee.
Expect pushback from Republicans in Congress if QE3 goes forward. Regardless, the time for further action has come. An avoidably slow recovery would be bad enough. A recovery that tails off into stagnation or worse is unacceptable. The Fed must spare no effort to prevent it.
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