As the federal government spending sequester begins, fiscal policy is currently stealing the headlines, but Ben Bernanke discussed future monetary policy at two important appearances during the past week. Somewhat ironically, the two broad methods by which government policy influences the economy are working in opposition: even as fiscal activity deflates, the Federal Reserve is actively working to keep the economy from submerging into another recession.
Bernanke’s first major appearance of the week was in his Semiannual Monetary Policy Report to the Congress. In this speech, the Chairman of the Fed provided Congress with an assessment of the current economic situation before outlining policies that the Fed is using to help boost economic activity. In particular, Bernanke outlined two “tools” that the Fed is wielding: “forward guidance” for the federal funds rate, and “large-scale purchases of longer-term securities.”
Both of these tools aim to promote economic growth by reducing uncertainty about the future financial environment. I’ve previously discussed how economic uncertainty can hinder business activity, and the Federal Reserve Bank is acting to provide a more stable outlook for U.S. businesses.
In a second appearance last week, at the Annual Monetary/Macroeconomics Conference in San Francisco, Bernanke extended his discussion of the Fed’s current policies. In this longer speech, the Fed’s Chairman outlined four “prongs” of the strategy, which he characterized as relying “primarily on monitoring, supervision and regulation, and communication.” Again, the underlying motivation is to reduce economic uncertainty so that businesses feel more comfortable about expanding their operations.
But, the Federal Reserve’s actions to reduce economic uncertainty are easily undermined by the whirlwind of obscurity being produced on the Fiscal Policy side of government. In his report before Congress, Bernanke called out the Legislature directly:
“Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health. The economy’s performance both over the near term and in the longer run will depend importantly on the course of fiscal policy. The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery.”
Indeed, Mr. Chairman. It is very challenging to promote financial liquidity when pedaling up a Fiscal hill.